Understanding Go Curry Cracker, can you ELI5?

[FIstateofmind]

Hi all,

I've read Go Curry Cracker's tax articles and want to make sure I understand correctly.

I'm referencing this section of Never pay taxes again:

"Using the 2018 tax rules, a married couple can earn up to $24,000 a year without paying tax.  This is because the government allows us a standard deduction for a married couple of $24,000.  Other deductions can be applied, such as for 401k contributions, increasing the amount of tax free income.  (That advice from the big brokerage firm hit the spot on this one.)  Normally the deductions are increased every year with inflation or some arbitrary level decided by Congress

Once income and spending exceeds this level, taxes must be paid.  Unless…

Unless that income comes from qualified dividends or long term capital gains.  In this case, a married couple can have $24,000 a year in income AND $77,200 in investment income, TAX FREE (if that isn’t a strong signal to not work, I don’t know what is.)"


I'm a single filler who earns about $40k in taxable income...

The capital gains tax bracket for 2019 15%   $39,375

As long as I'm under the 2019 threshold of $39,375, I can sell $39,375 worth of stocks at 15% tax?

I want to sell some stock this year. How can I pay the least amount of tax possible?

I'm honestly pretty confused and if some seasoned Mustachians could help me out that would be greatly appreciated.

[Much Fishing to Do]

If you earn 40k, then if the only deduction u take this year is the standard ($12k), you have about $28k of taxable earned income.

So you have room for recognizing about $12k in gains from the sale of your stock before those gains are taxed (the $39,375 threshold you mention is at what point the gains will get taxed at 15%, below that you are at 0).  You'll actually want to look at the cost basis of what you are selling and make sure they've been held more than a year (LTG) to make this work perfectly (e.g. maybe you have investments that have doubled, so selling $24k in stock would mean only about $12k in gains, which you can basically take tax free). Above that you will have your gains taxed at 15%, but again, just your gains, not the entire amount you are selling.  So the best move taxwise you can make is maximize those 0% gains but no more.  Those who are best at optimizing all this will actually sell stock to use up all and exactly that amount of 0% gains whether they need the cash or not, b/c even if you go back and repurchase the same stock right away you now have the higher basis for free (so less gain in future sales).  Repeat every year.  IF by doing this you can keep your unrecognized gains very low so when you get to the point you need to be selling more stock to live off of after living your earned income behind you'll be able to sell lots without recognizing much gain so in FIRE should be easily paying zero.

[FIstateofmind]

If you earn 40k, then if the only deduction u take this year is the standard ($12k), you have about $28k of taxable earned income.

So you have room for recognizing about $12k in gains from the sale of your stock before those gains are taxed (the $39,375 threshold you mention is at what point the gains will get taxed at 15%, below that you are at 0).  You'll actually want to look at the cost basis of what you are selling and make sure they've been held more than a year (LTG) to make this work perfectly (e.g. maybe you have investments that have doubled, so selling $24k in stock would mean only about $12k in gains, which you can basically take tax free). Above that you will have your gains taxed at 15%, but again, just your gains, not the entire amount you are selling.  So the best move taxwise you can make is maximize those 0% gains but no more.  Those who are best at optimizing all this will actually sell stock to use up all and exactly that amount of 0% gains whether they need the cash or not, b/c even if you go back and repurchase the same stock right away you now have the higher basis for free (so less gain in future sales).  Repeat every year.  IF by doing this you can keep your unrecognized gains very low so when you get to the point you need to be selling more stock to live off of after living your earned income behind you'll be able to sell lots without recognizing much gain so in FIRE should be easily paying zero.

Hey, thanks so much. This makes total sense and really clarified the concept for me.

What’s the best way to keep track of my capital gains? When I go to sell the stock, will vanguard inform me or do I have to track in my own? Thanks!