Capital gain tax advice needed - 10% tax bracket in 2012

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Lethal
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Capital gain tax advice needed - 10% tax bracket in 2012

Post by Lethal » Fri Dec 07, 2012 6:20 pm

I am a grad student and only worked for the summer so I have a low income for 2012 and will be in the 10% tax bracket this year. I have large unrealized capital gains on just about all of my investments in my taxable account and these unrealized gains total about $45,000 currently.

For 2012 the 10-15% tax brackets do not pay capital gains taxes, correct? If this is the case, would it be wise to sell these investments (which are all long-term) before the end of the year? My thinking is that if I continue to hold these I will be in a higher tax bracket next year (probably 25% bracket) since I will have a full-time job and would have to pay a lot in taxes when I sell these investments, especially with the increasing rates in 2013.

Do capital gains count toward my tax bracket income? If I sold all of my investments and had $45,000 in capital gains would that put me in the 25% tax bracket for this year instead of the 10% bracket and cause me to pay the 15% long-term tax on all of my gains? And my last question are there any wash sales rules for this like with capital losses or could I sell all my investments in 2012 to avoid paying capital gains taxes and then immediately re-buy the same day and restart everything at a higher cost?

I am a little confused on how these taxes work and if anyone could clear this up I would appreciate it!

Edit: After going through my accounts, here is an updated summary with estimated totals of everything:

$6,000 wages
$45,000 unrealized long-term capital gains
$2,500 realized capital gains
$2,000 dividends
$7,000 Traditional IRA to Roth IRA conversion (not done yet)
$14,000 Tuition paid
Age 26, Single, Full-time Graduate Student
Last edited by Lethal on Sat Dec 08, 2012 10:12 am, edited 3 times in total.

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dmcmahon
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by dmcmahon » Fri Dec 07, 2012 6:30 pm

You can sell for a gain and then buy back the position (assuming you don't really want to liquidate the investment) to reset your basis. I believe the "wash sale" rules apply only to losses, so you can buy back your positions within seconds of selling them. This may be worth the transaction costs (commissions and the spread) if you really can realize the gains at 0%. You are correct to think that the gains may themselves push you into a higher bracket, meaning that some of the profits would be subject to this year's 15% rate. Whether that's a good move for you or not is harder to judge. This may be helpful:

http://www.kiplinger.com/columns/taxtip ... redux.html

livesoft
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by livesoft » Fri Dec 07, 2012 6:35 pm

Try this: Do a web search for "taxcaster", go to Taxcaster and enter your numbers. The more you learn about how to do your own taxes, the more taxes will you will save. This is really easy, so come back and let us know the answers to your questions. That is, you should be able to clear this up all by yourself.
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kaneohe
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by kaneohe » Fri Dec 07, 2012 6:36 pm

You didn't say whether you were married or not so ........assuming you are single (you can change the numbers if married):
based on this http://fairmark.com/reference/index.htm

The 25% bracket is reached at (rounded ) 35.4K taxable income. Add your 3.8K exemption and 6.0K (rounded) std deduction,
and you get 45.2K of AGI allowed . Sounds like with your other income , you'll probably be in the 25% bracket a bit.
The part of your LTCG that causes your total to exceed 45.2K, will be taxed at 15%; the rest will be at 0%. Sounds like it's a
sensible thing to do for most of the LTCG.

no wash rule on gains, only losses.

Taxcaster or other tax software is a good way to doublecheck yourself.

For a good education on how this works , see tfb's chart on 12/11/2011 here:
http://www.bogleheads.org/forum/viewtop ... 10&t=86849

If you're in the 10% bracket w/ your grad student income, that means you earned at least your exemption and (assumed) std deduction (> 9.8K) so you'd have to retain at least that amount of LTCG or else you'd be in the 25% bracket and paying 15% on some part of the LTCG. Depending on what your crystal ball says about the future, might not be so bad although you'd have to the reinvesting w/ less available and it would take some time to catch up due to that........an interesting exercise for a grad student.
Last edited by kaneohe on Fri Dec 07, 2012 6:46 pm, edited 1 time in total.

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Lethal
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by Lethal » Fri Dec 07, 2012 6:44 pm

Thank you very much for the replies. I am single and the only income for 2012 I have is about $6,000. I will read more up on this from the links provided, but it seems like it would be smart to sell at least some of these investments and repurchase to lower/avoid these taxes. The transaction fees if I sold and repurchased would probably only be $100 and the potential capital gains taxes could easily total over $9000 if I sold them next year while in a high tax bracket. I need to take any advantages I can while in the 10% bracket since I will probably never be there again until I retire.

kaneohe
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by kaneohe » Fri Dec 07, 2012 6:51 pm

If your income is 6K, the std deduction pretty much erases that and the personal exemption makes your AGI negative
(if allowed) so looks to me like you're in the 0% bracket.

DSInvestor
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by DSInvestor » Fri Dec 07, 2012 6:56 pm

I'd also suggest running your numbers through Taxcaster which is a free online tax calculator. You can enter you 6K income and then play around with different amounts of capital gain, Long term, short term and what happens to your Fed Tax.

Your summer job income would allow you to make a full 5K Roth IRA contribution. This would allow you to shift some of your assets from your taxable account into a Roth IRA and grow tax free.

If you have any assets in Traditional IRA, now would be a good time to convert to Roth IRA since you may be able to convert with little or no tax cost.
Last edited by DSInvestor on Fri Dec 07, 2012 7:06 pm, edited 1 time in total.
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BL
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by BL » Fri Dec 07, 2012 7:00 pm

This might be a great time to do some studying about investment before you buy again. Check out the 3-fund portfolio or others in the Wiki and read some recommended books.

If you are buying funds in taxable accounts, you may want to wait until after dividends are split out later this month.

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Lethal
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by Lethal » Fri Dec 07, 2012 7:08 pm

DSInvestor wrote:I'd also suggest running your numbers through Taxcaster which is a free online tax calculator. You can enter you 6K income and then play around with different amounts of capital gain, Long term, short term and what happens to your Fed Tax.

If you have any assets in Traditional IRA, now would be a good time to convert to Roth IRA.
I just played around with Taxcaster and it is a nice little tool. Not sure if this is correct, but it says with my education credits from paying $12k in tuition, $6000 in wages, $45000 in long-term gains, and $1500 in dividends that I would get a $1000 refund. Doesn't seem right since no taxes were withheld from my paychecks and I didn't pay taxes on anything else this year.

I only have about $5k in a Traditional IRA account and the rest in a Roth IRA account. The Traditional IRA funds came from an employer match 401k that I rolled over to my Vanguard IRA account and the employer match portion was considered Traditional IRA funds. Can this be converted to Roth?

livesoft
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by livesoft » Fri Dec 07, 2012 7:10 pm

convert away.

also you can even make a Roth IRA contribution since you have $6000 in wages.
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Lethal
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by Lethal » Fri Dec 07, 2012 7:17 pm

BL wrote:This might be a great time to do some studying about investment before you buy again. Check out the 3-fund portfolio or others in the Wiki and read some recommended books.

If you are buying funds in taxable accounts, you may want to wait until after dividends are split out later this month.
I have done a lot of investment reading over the past couple years (mostly on here) and will be condensing my portfolio significantly and taking a lot of risk away from it in 2013. Since I have found this site I have been following the 3 fund portfolio on all new investments and for all my retirement funds that I rolled over last year, but I never sold the investments I had purchased previously.

Basically I started full-time work in 2008 and dumped just about all of my earnings as well as my savings into the market in 2009 when the DOW was around 7000. I had very little expenses since I was living at home at the time and had a good job. A lot of it went into various Vanguard funds, but I did buy some individual stocks that I got lucky on. Several of the stocks currently have 100-250% unrealized gains on them now so I wanted to learn more about reducing my potential taxes since I have a lot of potential gains.

kaneohe
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by kaneohe » Fri Dec 07, 2012 8:18 pm

Lethal wrote:
DSInvestor wrote: I just played around with Taxcaster and it is a nice little tool. Not sure if this is correct, but it says with my education credits from paying $12k in tuition, $6000 in wages, $45000 in long-term gains, and $1500 in dividends that I would get a $1000 refund. Doesn't seem right since no taxes were withheld from my paychecks and I didn't pay taxes on anything else this year.
Perhaps the 1K is coming from the refundable part of the education credit (AOC). see p. G3 here
http://www.irs.gov/pub/irs-pdf/p4012.pdf

but note the footnotes on the chart that may/may not disqualify you (relating to support). Refundable means you
can get it back even if you owe no tax. Non-refundable means you need to apply it against tax owed so perhaps if you had more income (from conversions or LTCG), you could make it work for you still.

pshonore
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by pshonore » Fri Dec 07, 2012 8:55 pm

Grad students are not eligible for the AOC. Liftime Learning Credit and Tutition and Fees deduction (if reinstated) are alternatives but they are not refundable.

kaneohe
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by kaneohe » Fri Dec 07, 2012 9:55 pm

pshonore wrote:Grad students are not eligible for the AOC. Liftime Learning Credit and Tutition and Fees deduction (if reinstated) are alternatives but they are not refundable.
pshonore.........good catch, thanks! Just goes to show that in the wrong hands, P4012 & Taxcaster can be equally dangerous :happy .........or, it helps to read the whole page.

SobeCane
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by SobeCane » Fri Dec 07, 2012 10:37 pm

6,000 Wages
1,500 Qualified Dividends
5,000 Conversion from Traditional to Roth
41,897 Capital Gains
54,397 AGI

The lifetime learning credit starts to phase out at $52,000 so I cut back a little on the capital gains but we also want enough income to utilize the non refundable credit

(5,950) Standard Deduction
(3,800) Personal Exemption

$44,647 Taxable Income

$1,521 Tax
(1,521) Lifetime Learning Credit

0 Due / 0 Refund


Or, if you want to realize the entire $45,000 of capital gain, you will be have to use the Tuition & Fees Deduction ($4,000 on page 1 of the return) and your tax due comes out to $1,086

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Lethal
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by Lethal » Sat Dec 08, 2012 12:07 am

Great info SobeCane, I appreciate the time you took to calculate and list it out.

After going back through my account, here are updated totals:

$6,000 wages
$45,000 unrealized long-term capital gains (net total including all unrealized losses)
$2,500 realized long-term capital gains
$2,000 dividends
$7,000 Traditional IRA to Roth IRA conversion
$14,000 Tuition paid

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Electron
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by Electron » Sat Dec 08, 2012 12:25 am

Lethal wrote:For 2012 the 10-15% tax brackets do not pay capital gains taxes, correct?
Not exactly. You need to look at how much space remains in the 15% bracket. You can fill up that remaining space with qualified dividends or capital gains either of which would be taxed at 0%. Any additional qualified dividends or capital gains above the 15% bracket would be taxed at 15%. Note that any additional ordinary income would push some qualified dividends or capital gains out of the 0% bracket.
Electron

Bob's not my name
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by Bob's not my name » Sat Dec 08, 2012 6:47 am

This article might be interesting to you for this year and next year: http://thefinancebuff.com/how-to-save-4 ... taxes.html

pshonore
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by pshonore » Sat Dec 08, 2012 8:01 am

OP should run his scenario thru TurboTax or some other software. If he's a full time student under 24, and his earned income is less than 1/2 of his support, he may be subject to AMT, which will change the tax calculations.

Bob's not my name
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by Bob's not my name » Sat Dec 08, 2012 8:24 am

pshonore wrote:OP should run his scenario thru TurboTax or some other software. If he's a full time student under 24, and his earned income is less than 1/2 of his support, he may be subject to AMT, which will change the tax calculations.
Good point. Prior posts indicate he's owned a car for ten years, so this seems unlikely.

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Lethal
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Re: Capital gain tax advice needed - 10% tax bracket in 2012

Post by Lethal » Sat Dec 08, 2012 10:10 am

pshonore wrote:OP should run his scenario thru TurboTax or some other software. If he's a full time student under 24, and his earned income is less than 1/2 of his support, he may be subject to AMT, which will change the tax calculations.
I am a 26 year old full-time grad student.

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