Author Topic: Help with Tax Gain Harvesting  (Read 907 times)

tennisray

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Help with Tax Gain Harvesting
« on: April 26, 2019, 05:58:53 AM »
For some reason, I'm having difficulty understanding this article from MadFientist:
https://www.madfientist.com/tax-gain-harvesting/
Can you help optimize/clarify the following situation?
Married filing jointly, W-2 income approx $83,000 minus pre-tax contributions (403b+457=$38k, pension= $7k, Health ins= $4k) Total=34k AGI
Dividends=10k
Interest=2k
Beneficiary IRA distribution=5k
Total=51k
Am I correct that I can sell shares of stocks/funds/etfs and pay 0% capital gains tax? However, I can only sell an amount of 78,750 (0% bracket) - 51k(income) or I'd have to pay capital gains on the whole amount?
Please let me know if I'm understanding this correctly or if I'm making a mistake in my assumptions regarding AGI, as well. Thanks!

seattlecyclone

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Re: Help with Tax Gain Harvesting
« Reply #1 on: April 26, 2019, 07:37:20 PM »
Not quite.

1) AGI minus your standard or itemized deductions is your taxable income. This is what the tax brackets are based on. So if you're married and taking the standard deduction, you can add $24k to that $78,750, making the AGI at which you start paying federal tax on long-term gains be a bit over $100k.
2) If your capital gains puts you over the limit by $1, you only pay 15% tax on that $1, not on all of your capital gains.

MDM

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Re: Help with Tax Gain Harvesting
« Reply #2 on: April 26, 2019, 11:05:22 PM »
Can you help optimize/clarify the following situation?
Married filing jointly, W-2 income approx $83,000 minus pre-tax contributions (403b+457=$38k, pension= $7k, Health ins= $4k) Total=34k AGI
Dividends=10k
Interest=2k
Beneficiary IRA distribution=5k
Total=51k AGI
Note the change in AGI.  See line 7 of your 2018 https://www.irs.gov/pub/irs-pdf/f1040.pdf.

Quote
Am I correct that I can sell shares of stocks/funds/etfs and pay 0% capital gains tax? However, I can only sell an amount of 78,750 (0% bracket) - 51k(income) or I'd have to pay capital gains on the whole amount?
Please let me know if I'm understanding this correctly or if I'm making a mistake in my assumptions regarding AGI, as well. Thanks!
See seattlecyclone's answer for the capital gains.

Instead of paying 0% on capital gains, you might be better in the long run to use Roth instead of traditional 403b and 457 contributions because they will cost you only a little more than 12% federal tax.  That is a relatively low tax rate, but what matters most is how it compares to the tax rate you will pay in retirement.

tennisray

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Re: Help with Tax Gain Harvesting
« Reply #3 on: April 27, 2019, 03:58:56 AM »
Thanks! That is nice that the standard deduction could bring down age to allow for 24k more income. But, are you guys sure that bumping up over that 0% income  limit doesn’t mean that you are taxed on the full amount of capital gains? I thought that this is different than income tax brackets and you lose the 0% cap gains tax on the full amount even $1 over. Using this calculator, sliding the income into the next tax bracket forces 15%cap gains tax https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/


terran

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Re: Help with Tax Gain Harvesting
« Reply #4 on: April 27, 2019, 06:02:23 AM »
Yes, you can definitely have some capital gains taxed at 0% and some at 15%. Capital gains brackets work the same way as regular tax brackets in that the income within a bracket is taxed at that bracket's rate. Note that the 0%, 15%, etc brackets apply to long term gains. Short term gains are taxed at ordinary income rates.

I think the calculator you linked is assuming that all of the capital gains "may be" above the 0% bracket when you enter an income range above the 0% bracket as it says "Your Estimated Capital Gains Tax May Be As High As."

MDM

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Re: Help with Tax Gain Harvesting
« Reply #5 on: April 27, 2019, 10:48:58 AM »
Thanks! That is nice that the standard deduction could bring down age to allow for 24k more income. But, are you guys sure that bumping up over that 0% income  limit doesn’t mean that you are taxed on the full amount of capital gains? I thought that this is different than income tax brackets and you lose the 0% cap gains tax on the full amount even $1 over. Using this calculator, sliding the income into the next tax bracket forces 15%cap gains tax https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/
If you would rather see the details than try to interpret some black box web page, see p. 40 of https://www.irs.gov/pub/irs-pdf/i1040gi.pdf.

You can see a worked example of that by entering some numbers in the Case Study Spreadsheet and following the results starting at cell Calculations!M7.

Or believe what seattlecyclone and terran wrote. ;)

tennisray

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Re: Help with Tax Gain Harvesting
« Reply #6 on: April 27, 2019, 12:51:50 PM »
Hi, can you clarify what you meant:?

Instead of paying 0% on capital gains, you might be better in the long run to use Roth instead of traditional 403b and 457 contributions because they will cost you only a little more than 12% federal tax.  That is a relatively low tax rate, but what matters most is how it compares to the tax rate you will pay in retirement.
[/quote]

Do you mean stop contributing to the 403b/457 and just fund a Roth IRA? I would only be able to contribute 6k, right?

tennisray

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Re: Help with Tax Gain Harvesting
« Reply #7 on: April 27, 2019, 12:55:07 PM »
Thanks! That is nice that the standard deduction could bring down age to allow for 24k more income. But, are you guys sure that bumping up over that 0% income  limit doesn’t mean that you are taxed on the full amount of capital gains? I thought that this is different than income tax brackets and you lose the 0% cap gains tax on the full amount even $1 over. Using this calculator, sliding the income into the next tax bracket forces 15%cap gains tax https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/
If you would rather see the details than try to interpret some black box web page, see p. 40 of https://www.irs.gov/pub/irs-pdf/i1040gi.pdf.

You can see a worked example of that by entering some numbers in the Case Study Spreadsheet and following the results starting at cell Calculations!M7.

Or believe what seattlecyclone and terran wrote. ;)

I am impressed with the spreadsheets! I will enter my info. My situation is different than the one I presented earlier. My wife still works, but I am trying to plan our financial situation if she retires in 5 years in regards to tax avoidance and Roth conversions. Thank you!

MDM

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Re: Help with Tax Gain Harvesting
« Reply #8 on: April 27, 2019, 01:03:32 PM »
Hi, can you clarify what you meant:?

Instead of paying 0% on capital gains, you might be better in the long run to use Roth instead of traditional 403b and 457 contributions because they will cost you only a little more than 12% federal tax.  That is a relatively low tax rate, but what matters most is how it compares to the tax rate you will pay in retirement.

Do you mean stop contributing to the 403b/457 and just fund a Roth IRA? I would only be able to contribute 6k, right?
Do you have a Roth option for the 403b and/or 457?  If not, can you persuade the school district (or whatever the employer is) to offer one? 

On that total income you each may contribute $6K to a Roth IRA, regardless of who is or isn't working, for a total of $12K.