Harvesting Capital Gains Expat with California residency

[felizcortez]

I am trying to optimize a few tax things prior to the end of the year.  I have been an expat in Mexico for the last year living on my sailboat(only been in the US less than 2 weeks total in 2020).  I think this may qualify me for the Foreign Earned Income Exclusion at a federal level.

Our income sources are as follows
Dividends from Taxable Brokerage account - $25203 Consisting of the following.
   VTIAX  - 11650.54
   VTSAX -  13552.95
Interest from Ally CD's and savings accounts - $2868
Total income should be around $28721 for the year.
Maried Filing Jointly
Residency is California

My prior residency is in California, but I'm pretty sure they will still consider me a resident even though I have lived out of hte country the last year and a half.  I don't own any property, but have a storage unit in California, a drivers license, and also voted overseas in California this year.  Based on what I've seen online, CA will still require me to file a state tax return with them.

I'm not sure how much of the dividend income is qualified vs unqualified dividends, does anyone know how to check this on Vanguard before getting tax forms?

I've punched my numbers into the case study spreadsheet and messed around with different long term capital gain amounts.  It looks like I can harvest about 2k in gains before I start paying California State taxes.  Things look okay even if I harvest about 30k of gains as i'd only be paying about $704 in taxes or 1.21% which isn't too bad.  50k of gains puts it right around $1566 of taxes so about 2%. 

I'm wondering whether I should take advantage of this low income no W2 year and how much of the gains I should potentially try to harvest and up the basis on.  Is there a cliff that I should avoid?

I'm not worried about affordable care act subsidies as I have an expat health insurance plan that covers me overseas.

I also have a large 401k from my old job that I could potentially transfer to an  IRA at vanguard and do roth conversions in the future, but it's likely too late to get this transferred before the end of the year.

Any thoughts or advice would be appreciated. 

[terran]

I use the 100% total US index, 75% total international index qualified dividend estimates in the "Hypothetical tax costs" table at https://www.bogleheads.org/wiki/Tax-efficient_fund_placement, but of course, those are only estimates.

I see no evidence in your post to say you don't already know this, but just in case, the FEIE applies only to earned income, not investment income or Roth conversions, and while I'm less certain about this I'm pretty sure non-earned income is taxed as if the excluded earned income wasn't excluded. Basically, while the excluded earned income isn't taxed it still uses up the standard deduction and space in the income tax and capital gains tax brackets (I think).

[felizcortez]

I use the 100% total US index, 75% total international index qualified dividend estimates in the "Hypothetical tax costs" table at https://www.bogleheads.org/wiki/Tax-efficient_fund_placement, but of course, those are only estimates.

I see no evidence in your post to say you don't already know this, but just in case, the FEIE applies only to earned income, not investment income or Roth conversions, and while I'm less certain about this I'm pretty sure non-earned income is taxed as if the excluded earned income wasn't excluded. Basically, while the excluded earned income isn't taxed it still uses up the standard deduction and space in the income tax and capital gains tax brackets (I think).

Thanks for the link.  I'll punch that into my numbers in the spreadsheet.  For the FEIE, I just started researching this so I'm not very familiar with it yet other than based on my time out of country I believe I qualify for it.

[terran]

I use the 100% total US index, 75% total international index qualified dividend estimates in the "Hypothetical tax costs" table at https://www.bogleheads.org/wiki/Tax-efficient_fund_placement, but of course, those are only estimates.

I see no evidence in your post to say you don't already know this, but just in case, the FEIE applies only to earned income, not investment income or Roth conversions, and while I'm less certain about this I'm pretty sure non-earned income is taxed as if the excluded earned income wasn't excluded. Basically, while the excluded earned income isn't taxed it still uses up the standard deduction and space in the income tax and capital gains tax brackets (I think).

Thanks for the link.  I'll punch that into my numbers in the spreadsheet.  For the FEIE, I just started researching this so I'm not very familiar with it yet other than based on my time out of country I believe I qualify for it.

I only have a passing familiarity with it too, but it sounds like you were out of the US for at least 330 days, so I would say you should qualify, but again, it's only for your earned income not investment income.

[MustacheAndaHalf]

If you have no earned income outside the U.S., I'd suggest ignoring the "Foreign Earned Income Exclusion".

I've only found CA deduction for 2019, when it was $9,074.
https://www.ftb.ca.gov/file/personal/deductions/index.html

It looks like the 2% CA tax bracket ends at $9,074 + $20,883 (about $30k):
https://www.nerdwallet.com/article/taxes/california-state-tax

[felizcortez]

I ended up selling a target date retirement fund I had in my brokerage account with about 3k of long term capital gains and purchasing more shares of VTSAX.  This should end up being about $20 total in total tax for 2020 based on the income entered into the spreadsheet (0.06% tax rate).  This not only simplifies the brokerage account by getting rid of a legacy mutual fund I owned, but I bumped up my basis on these shares of VTSAX too although in a slightly different fund. 

I thought about selling more, but the percentage starts creeping up and not sure it's worth doing.  I may look at changing my residency to South Dakota or Florida in order to take advantage of zero state income tax in future years.  Since I'm not living in the US anyway right now this could save me significant amounts of money over time.