Long-Term Gains and taxes (early retirement strategy)

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BlackStrat
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Long-Term Gains and taxes (early retirement strategy)

Post by BlackStrat » Sat Dec 10, 2016 9:51 am

I'm attempting to develop an early-retirement strategy and get my hands around what my tax situation would look like in the first couple of years.

I have about 18% of my investable portfolio in after-tax individual stocks (approx. 15% in a single one from a long-term company stock purchase program, with the rest in a larger number of individual stocks which don't really give me concern because they're a very small percentage of the total).

Obviously as a Boglehead I'm not comfortable with such a large percentage of my portfolio in one stock. To effectively avoid Capital Gains on these appreciated shares, I've decided on making my normal yearly charitable donations via this stock but the reinvested dividends purchasing new shares keep up with the depleted shares (a good problem to have).

However, I was reading about Long-Term Capital gains and saw the following statement:
Stocks you hold longer than a year are subject to a long-term capital gains tax rate when you sell them. This tax rate is capped at 15 percent, so even people in the top income tax bracket pay only 15 percent on long-term gains. If your normal income tax rate is 15 percent or 10 percent, you don't owe capital gains taxes on long-term stock gains.
Am I to understand that for my first year of retirement, if my income (via dividends and interest) is below approximately $37k (putting me in the 15 percent tax bracket), I could sell these appreciated shares and pay NO capital gains taxes? (and the sale of these shares would not add to my income for the year?)

This seems too good to be true and would allow me to live on the sale of this stock for a handful of years of my early retirement without losing a large amount of the stocks value via taxes. Am I looking at this correctly?

ResearchMed
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by ResearchMed » Sat Dec 10, 2016 10:01 am

BlackStrat wrote:I'm attempting to develop an early-retirement strategy and get my hands around what my tax situation would look like in the first couple of years.

I have about 18% of my investable portfolio in after-tax individual stocks (approx. 15% in a single one from a long-term company stock purchase program, with the rest in a larger number of individual stocks which don't really give me concern because they're a very small percentage of the total).

Obviously as a Boglehead I'm not comfortable with such a large percentage of my portfolio in one stock. To effectively avoid Capital Gains on these appreciated shares, I've decided on making my normal yearly charitable donations via this stock but the reinvested dividends purchasing new shares keep up with the depleted shares (a good problem to have).

However, I was reading about Long-Term Capital gains and saw the following statement:
Stocks you hold longer than a year are subject to a long-term capital gains tax rate when you sell them. This tax rate is capped at 15 percent, so even people in the top income tax bracket pay only 15 percent on long-term gains. If your normal income tax rate is 15 percent or 10 percent, you don't owe capital gains taxes on long-term stock gains.
Am I to understand that for my first year of retirement, if my income (via dividends and interest) is below approximately $37k (putting me in the 15 percent tax bracket), I could sell these appreciated shares and pay NO capital gains taxes? (and the sale of these shares would not add to my income for the year?)

This seems too good to be true and would allow me to live on the sale of this stock for a handful of years of my early retirement without losing a large amount of the stocks value via taxes. Am I looking at this correctly?
The value of those long term gains you sell need to be added in with other income as part of your *total* income.
If that total income pushes you into a higher tax bracket, then any additional long term gains, above that new bracket threshhold would be taxed at the 15% level.

You still wouldn't lose a "large amount of the stocks value via taxes", as it's capped at the cap gains rate.

And be careful of other consequences, such as cost of Medicare.

RM
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retiredjg
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by retiredjg » Sat Dec 10, 2016 10:25 am

BlackStrat wrote:Am I to understand that for my first year of retirement, if my income (via dividends and interest) is below approximately $37k (putting me in the 15 percent tax bracket), I could sell these appreciated shares and pay NO capital gains taxes?
There is something else to consider as well as the cap gains being added to your income.

It is not your income that needs to be below $37,650 (if you are single). It is your taxable income that needs to be below $37,650. Let's assume you are not receiving SS or a pension and you get $1k in dividends and interest. You also get the standard deduction (at least) and 1 personal exemption which add up to near $10k. So you could sell up to $46,650 in long term capital gains that first year without paying any tax.

Well, let's say $46,500 just for wiggle room.

If you wanted to sell more to reduce your exposure to that one stock, the excess would be taxed at 15% - a significant discount over ordinary income.

jane1
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by jane1 » Sat Dec 10, 2016 10:26 am

BlackStrat wrote:To effectively avoid Capital Gains on these appreciated shares, I've decided on making my normal yearly charitable donations via this stock but the reinvested dividends purchasing new shares keep up with the depleted shares (a good problem to have).
Why don't you stop reinvesting dividends in this single stock? That way you are not increasing an already large exposure to a single stock.

BlackStrat
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by BlackStrat » Sat Dec 10, 2016 11:12 am

I do have a rainy-day (cash) fund which could be used in tandem with the strategy above to avoid taxes (keeping me at a low bracket) and get me through living expenses for a few early retirement years before I begin my actual withdrawal strategy.

yes - I'll end the dividend reinvestment (although I've got to admit I've enjoyed watching this particular stock portfolio grow over the years mostly due to the dividend reinvestment).

thanks for the responses and insight.

JW-Retired
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by JW-Retired » Sat Dec 10, 2016 11:27 am

BlackStrat wrote: yes - I'll end the dividend reinvestment (although I've got to admit I've enjoyed watching this particular stock portfolio grow over the years mostly due to the dividend reinvestment).
If the growth is mostly from dividend reinvestment, then your capital gains may a good deal less than you might be guessing they are. Do you know what your cost basis is for your various lots?
JW
Retired at Last

BlackStrat
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by BlackStrat » Sat Dec 10, 2016 6:45 pm

JW-Retired wrote:If the growth is mostly from dividend reinvestment, then your capital gains may a good deal less than you might be guessing they are. Do you know what your cost basis is for your various lots?
JW
yeah - I finally went through and calculated (to the best of my knowledge) my cost basis for all the shares. These are going back nearly 30 years and the stock has seen splits and company spin-offs; a LOT of activity. Part of me just wants to hold onto it to include in my estate to avoid the hassle of tracking everything.

gerntz
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by gerntz » Sun Dec 11, 2016 8:21 am

BlackStrat wrote:
JW-Retired wrote:If the growth is mostly from dividend reinvestment, then your capital gains may a good deal less than you might be guessing they are. Do you know what your cost basis is for your various lots?
JW
yeah - I finally went through and calculated (to the best of my knowledge) my cost basis for all the shares. These are going back nearly 30 years and the stock has seen splits and company spin-offs; a LOT of activity. Part of me just wants to hold onto it to include in my estate to avoid the hassle of tracking everything.
You can use that appreciated stock for gifting & deduct the current value while the cap gains tax goes away if gifted to charity.

BlackStrat
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by BlackStrat » Sun Dec 11, 2016 9:19 am

gerntz wrote: You can use that appreciated stock for gifting & deduct the current value while the cap gains tax goes away if gifted to charity.
That's actually my current strategy; monthly I buy more VTSAX shares with what I would've contributed to a couple of charities and then once a year I donate shares instead. However with early retirement possibly within a year or two I'll still have a balance.

I was also thinking opening a Donor Advised Fund and transferring more than a years charitable contributions to get a large tax break in my last year of work and be able to distribute from there for the first few years of retirement.

gerntz
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by gerntz » Sun Dec 11, 2016 8:18 pm

BlackStrat wrote:
gerntz wrote: You can use that appreciated stock for gifting & deduct the current value while the cap gains tax goes away if gifted to charity.
That's actually my current strategy; monthly I buy more VTSAX shares with what I would've contributed to a couple of charities and then once a year I donate shares instead. However with early retirement possibly within a year or two I'll still have a balance.

I was also thinking opening a Donor Advised Fund and transferring more than a years charitable contributions to get a large tax break in my last year of work and be able to distribute from there for the first few years of retirement.
Great approach imo.

gus1961
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by gus1961 » Sun Dec 11, 2016 8:53 pm

I'm asking the experts here.... I'll be in a similar situation soon and need to plan ahead.... Hope it helps the OP as well.
- If he's just over the $37,650 limit (after deductions) can he further reduce taxable income by making a contribution to a Trad 401 IRA? (Edit- I mean Trad IRA, not 401)
- If total income (A.D) is just below $37,650, cap gains tax is zero. If it's just over $37,650 it jumps to 15%? or is it progressive....
I understand the total tax is progressive.... but is cap gains tax zero or 15% with no in-between?
Thanks.
Last edited by gus1961 on Mon Dec 12, 2016 12:09 pm, edited 2 times in total.

retiredjg
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by retiredjg » Mon Dec 12, 2016 7:17 am

gus1961 wrote:- If he's just over the $37,650 limit (after deductions) can he further reduce taxable income by making a contribution to a Trad 401 IRA?
A person with a job could have reduced taxable income by contributing to traditional 401k during that tax year or traditional IRA up to the April 15th deadline (since under the AGI limit).
- If total income (A.D) is just below $37,650, cap gains tax is zero. If it's just over $37,650 it jumps to 15%? or is it progressive....
I under stand the total tax is progressive.... but is cap gains tax zero or 15% with no in-between?
Capital gains tax is 0%, 15%, or 20% (in the highest tax bracket). There are no in-betweens.

However, something happens right at the $37,650 border that increases the marginal rate to something higher than 15% for the first incoming dollars. I cannot remember what it is though. :annoyed Maybe someone else will.

gus1961
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by gus1961 » Mon Dec 12, 2016 12:12 pm

retiredjg wrote: A person with a job could have reduced taxable income by contributing to traditional 401k during that tax year or traditional IRA up to the April 15th deadline (since under the AGI limit).
- If total income (A.D) is just below $37,650, cap gains tax is zero. If it's just over $37,650 it jumps to 15%? or is it progressive....
I under stand the total tax is progressive.... but is cap gains tax zero or 15% with no in-between?
Capital gains tax is 0%, 15%, or 20% (in the highest tax bracket). There are no in-betweens.

However, something happens right at the $37,650 border that increases the marginal rate to something higher than 15% for the first incoming dollars. I cannot remember what it is though. :annoyed Maybe someone else will.
Thanks for the reply. I meant to write Trad IRA, not 401 IRA.
So if retired, there is still the option to contribute to a Trad IRA to offset income from investments?

retiredjg
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by retiredjg » Mon Dec 12, 2016 12:22 pm

gus1961 wrote:So if retired, there is still the option to contribute to a Trad IRA to offset income from investments?
Only if you (or a spouse) has compensation (from a job).

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PhysicianOnFIRE
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by PhysicianOnFIRE » Mon Dec 12, 2016 1:09 pm

BlackStrat wrote:
gerntz wrote: You can use that appreciated stock for gifting & deduct the current value while the cap gains tax goes away if gifted to charity.
That's actually my current strategy; monthly I buy more VTSAX shares with what I would've contributed to a couple of charities and then once a year I donate shares instead. However with early retirement possibly within a year or two I'll still have a balance.

I was also thinking opening a Donor Advised Fund and transferring more than a years charitable contributions to get a large tax break in my last year of work and be able to distribute from there for the first few years of retirement.
The DAF is an excellent strategy that I've been using in my final years of working. I don't have big gains to part with, but it makes good sense to take the tax deductions now while my income is high, and dole the money out from the DAF over time in retirement.

Also, as it has been suggested, if you haven't already, turn off automatic dividend reinvestment into the single stock. If you have, please disregard.

:beer
-PoF

BlackStrat
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Re: Long-Term Gains and taxes (early retirement strategy)

Post by BlackStrat » Fri Dec 16, 2016 10:16 am

I was going to start a new thread but I appreciate the responses so far and have another few questions (related):

- if I retire early and don't plan on taking SS or RMD's until around 70, could I still write off charitable contributions against any dividend/interest/capital gain income for a given year?

- I know there are yearly limits on charitable donations of stocks with long-term capital gains (although I find the details confusing). If I want to open a Vanguard DAF (minimum $25k) and the percentage of that to my AGI exceeds the allowable limit - can I write this off the following year? (and if I do the same my last year of employment can I realize the tax savings for the excess in the first year of retirement against a more limited dividend/interest/capital gain income?

- I would guess that all this activity with attempting to eliminate/minimize gains on selling highly appreciated company stock would limit any opportunity to do Roth conversions?

so many strategies...so confusing

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Re: Long-Term Gains and taxes (early retirement strategy)

Post by grabiner » Fri Dec 16, 2016 11:05 pm

BlackStrat wrote:I was going to start a new thread but I appreciate the responses so far and have another few questions (related):

- if I retire early and don't plan on taking SS or RMD's until around 70, could I still write off charitable contributions against any dividend/interest/capital gain income for a given year?
Yes, as long as it is worth itemizing deductions. (Your deduction for state income taxes will probably decline when you retire, your deduction for mortgage interest will decline as your mortgage is paid down, and your standard deduction increases when you turn 65. Therefore, you might find yourself taking the standard deduction in retirement, or might lose the benefit of part of the itemized deduction if you only have enough to itemize because of the charitable contributions.)
- I know there are yearly limits on charitable donations of stocks with long-term capital gains (although I find the details confusing). If I want to open a Vanguard DAF (minimum $25k) and the percentage of that to my AGI exceeds the allowable limit - can I write this off the following year? (and if I do the same my last year of employment can I realize the tax savings for the excess in the first year of retirement against a more limited dividend/interest/capital gain income?
Excess charitable contributions carry over to the next year. (But check with your state as well; states have many different rules for deductions.)
- I would guess that all this activity with attempting to eliminate/minimize gains on selling highly appreciated company stock would limit any opportunity to do Roth conversions?
Roth conversions are an independent issue. If your marginal tax rate at 65 is lower than it will be at 70, then it is desirable to make Roth conversions at 65 because you pay less tax.
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