Long-term capital gains: Federal tax, state tax, NIIT

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

I'm a long-time 3-fund portfolio holder (with small-cap-value fund tilt).
I'm 36, single, live in CA, I'm in high tax bracket (35% federal tax, 11.3% CA tax). (I'm in 15% LTCG tax bracket, but I may move to 20% LTCG tax bracket this year.)

Thinking about around 10 years from now, where I plan to retire (from corporate jobs, not working, I will be running my own businesses afterwards).When I start withdrawing money from this 3-fund portfolio (all of which will qualify for LTCG with sufficient amount of wait time):

1) Federal tax: Checking these LTCG tax brackets https://www.nerdwallet.com/article/taxe ... -tax-rates, 0-40K range gets taxed 0%, which jumps to 15% after 40K. I assume this number that is taxed is AGI, which is after standard deduction (I think 12K) plus itemized deductions. Is there any way to minimize federal tax at this withdrawal phase, or even better, make it zero? (I can withdraw the allocations that has a loss instead of gain, that is one way, but for the ones with gains, is there a way to reduce federal taxes?

2) State tax: I'm in CA. For finding out how much CA tax I will pay for LTCG, I checked these CA tax brackets here (https://www.tax-brackets.org/californiataxtable), and I see that, even with 45K AGI, I get taxed 8% for any investment I sell, which qualifies for LTCG. I want to avoid this, because, although I will no work for corporate, and work on my own businesses, I may have some side income from other passive income methods (e.g. real estate, which I do't have right now), which can ve me to 8% CA tax bracket. Any recommendations on how to avoid this state tax? Another question on this one: If I move to a no-state-tax like WA, and sell these funds that qualify for LTCG, do I get taxed based on the state tax rules of the state I reside (WA), or the state I resided when I purchased these funds. (Also, is the answer to this question the same for RSUs that are granted by companies I worked at?)

3) NIIT: Is there any way to avoid this tax? Would minimizing AGI / income after retirement in 10 years change NIIT amount, or is it flat 3.8% no matter what my AGI is?

Thanks in advance.
User avatar
FiveK
Posts: 10290
Joined: Sun Mar 16, 2014 2:43 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by FiveK »

ThisJustIn wrote: Thu Oct 15, 2020 2:37 am 1) Federal tax: Checking these LTCG tax brackets https://www.nerdwallet.com/article/taxe ... -tax-rates, 0-40K range gets taxed 0%, which jumps to 15% after 40K. I assume this number that is taxed is AGI, which is after standard deduction (I think 12K) plus itemized deductions.
See Form 1040: Adjusted Gross Income (AGI) comes before the standard/itemized deduction. Tax brackets refer to taxable income, which comes after the standard/itemized deduction.
Is there any way to minimize federal tax at this withdrawal phase, or even better, make it zero? (I can withdraw the allocations that has a loss instead of gain, that is one way, but for the ones with gains, is there a way to reduce federal taxes?
Easiest way to pay no tax is to have no income. But that's probably not what you had in mind, particularly if you are in the 35% bracket now....
2) State tax: I'm in CA. For finding out how much CA tax I will pay for LTCG, I checked these CA tax brackets here (https://www.tax-brackets.org/californiataxtable), and I see that, even with 45K AGI, I get taxed 8% for any investment I sell, which qualifies for LTCG. I want to avoid this, because, although I will no work for corporate, and work on my own businesses, I may have some side income from other passive income methods (e.g. real estate, which I do't have right now), which can ve me to 8% CA tax bracket. Any recommendations on how to avoid this state tax?
Some comment on AGI/deduction/taxable income as above. To avoid capital gains and the taxes on them, don't sell investments with gains.
3) NIIT: Is there any way to avoid this tax? Would minimizing AGI / income after retirement in 10 years change NIIT amount, or is it flat 3.8% no matter what my AGI is?
Keep AGI under $200K as a single filer.
User avatar
Cyclesafe
Posts: 1175
Joined: Wed Dec 31, 2014 1:03 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by Cyclesafe »

Play around with TurboTax. If you don't do your taxes now, buy the software anyway and reproduce your 2019 return. Then make changes to your various inputs to see how your taxes are affected. Just focusing on marginal rates, or worse yet, heuristics, will not yield for you the full impact of the changes you want to understand.

Taxes are generally assessed when and where the income is incurred / realized. Transition years between state residences can sometimes be tricky.

The worse part of NIIT is that the exclusion is not adjusted for inflation. What is annoying now will be downright aggravating in the years ahead.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)
trueblueky
Posts: 1847
Joined: Tue May 27, 2014 3:50 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by trueblueky »

If you know tax rates will be in 10 years, wow!

However, the 2017 tax law has rates returning to their previous levels before that.
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

trueblueky wrote: Thu Oct 15, 2020 8:09 am If you know tax rates will be in 10 years, wow!

However, the 2017 tax law has rates returning to their previous levels before that.
Yes, yes, I couldn't add every single caveat to my post, I'm well aware tax brackets do change.
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

FiveK wrote: Thu Oct 15, 2020 3:23 am
ThisJustIn wrote: Thu Oct 15, 2020 2:37 am 1) Federal tax: Checking these LTCG tax brackets https://www.nerdwallet.com/article/taxe ... -tax-rates, 0-40K range gets taxed 0%, which jumps to 15% after 40K. I assume this number that is taxed is AGI, which is after standard deduction (I think 12K) plus itemized deductions.
See Form 1040: Adjusted Gross Income (AGI) comes before the standard/itemized deduction. Tax brackets refer to taxable income, which comes after the standard/itemized deduction.
Is there any way to minimize federal tax at this withdrawal phase, or even better, make it zero? (I can withdraw the allocations that has a loss instead of gain, that is one way, but for the ones with gains, is there a way to reduce federal taxes?
Easiest way to pay no tax is to have no income. But that's probably not what you had in mind, particularly if you are in the 35% bracket now....
2) State tax: I'm in CA. For finding out how much CA tax I will pay for LTCG, I checked these CA tax brackets here (https://www.tax-brackets.org/californiataxtable), and I see that, even with 45K AGI, I get taxed 8% for any investment I sell, which qualifies for LTCG. I want to avoid this, because, although I will no work for corporate, and work on my own businesses, I may have some side income from other passive income methods (e.g. real estate, which I do't have right now), which can ve me to 8% CA tax bracket. Any recommendations on how to avoid this state tax?
Some comment on AGI/deduction/taxable income as above. To avoid capital gains and the taxes on them, don't sell investments with gains.
3) NIIT: Is there any way to avoid this tax? Would minimizing AGI / income after retirement in 10 years change NIIT amount, or is it flat 3.8% no matter what my AGI is?
Keep AGI under $200K as a single filer.
Please read. I will not be working in corporate after retirement in ~10 years, but I will create my own businesses. So, I won't have W2 income, and I may have business income, which I can invest in the business and avoid taxes (Bezos style, or, you-know-who style). So, there is a chance that I can fall into 0% tax bracket, UNLESS, income from my already-present investments (e.g. gains from 3-fund portfolio sell, company RSU stock sell, or real estate income (e.g.rent). This second part is what I'm asking. How do I avoid being moved to a higher tax bracket when I have no W2 income?

"Easiest way to pay no tax is to have no income. " => Thank you for this.
"But that's probably not what you had in mind, particularly if you are in the 35% bracket now...." => That's exactly what I have in mind, dropping from 35% to 0% tax bracket if possible (I will have no W2 income).

"See Form 1040: Adjusted Gross Income (AGI) comes before the standard/itemized deduction. Tax brackets refer to taxable income, which comes after the standard/itemized deduction. " => Yes, I thought I made it clear that I'm aware of this "AGI - deductions" is the taxable income.

"Keep AGI under $200K as a single filer." => Does this ensure no NIIT?
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

Cyclesafe wrote: Thu Oct 15, 2020 6:13 am Play around with TurboTax. If you don't do your taxes now, buy the software anyway and reproduce your 2019 return. Then make changes to your various inputs to see how your taxes are affected. Just focusing on marginal rates, or worse yet, heuristics, will not yield for you the full impact of the changes you want to understand.

Taxes are generally assessed when and where the income is incurred / realized. Transition years between state residences can sometimes be tricky.

The worse part of NIIT is that the exclusion is not adjusted for inflation. What is annoying now will be downright aggravating in the years ahead.
I got this "play with Turbotax" suggestion multiple times before, maybe it is time.

"The worse part of NIIT is that the exclusion is not adjusted for inflation. What is annoying now will be downright aggravating in the years ahead." => Could you clarify what you mean by "the exclusion is not adjusted for inflation"?
jebmke
Posts: 11396
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by jebmke »

ThisJustIn wrote: Thu Oct 15, 2020 10:45 am "Keep AGI under $200K as a single filer." => Does this ensure no NIIT?
The NIIT calculation is not complicated. I don’t recall the form number but if you look at the IRS form, it walks through some ver rudimentary arithmetic. When I first looked at I was surprised inasmuch as I was expecting a more complicated math.

edit: the form is Form 8960
When you discover that you are riding a dead horse, the best strategy is to dismount.
jbrunner
Posts: 3
Joined: Fri Sep 25, 2020 5:38 am

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by jbrunner »

https://ofm.wa.gov/budget/state-budgets ... ndividuals

Someone posted about WA state having no state tax. The CG tax will be brought up again when the legislature meets in January 2021.
trueblueky
Posts: 1847
Joined: Tue May 27, 2014 3:50 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by trueblueky »

ThisJustIn wrote: Thu Oct 15, 2020 10:39 am
trueblueky wrote: Thu Oct 15, 2020 8:09 am If you know tax rates will be in 10 years, wow!

However, the 2017 tax law has rates returning to their previous levels before that.
Yes, yes, I couldn't add every single caveat to my post, I'm well aware tax brackets do change.
To be clearer, it Congress does nothing, tax rates will revert to pre-2017 law. Standard deduction goes down. Exemptions reappear. 12% becomes 15%. As we get closer, it will become more important to watch that. There will be arbitrage opportunities and pitfalls as we move from new law to old.
User avatar
FiveK
Posts: 10290
Joined: Sun Mar 16, 2014 2:43 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by FiveK »

ThisJustIn wrote: Thu Oct 15, 2020 10:45 am
FiveK wrote: Thu Oct 15, 2020 3:23 am
ThisJustIn wrote: Thu Oct 15, 2020 2:37 am 1) Federal tax: Checking these LTCG tax brackets https://www.nerdwallet.com/article/taxe ... -tax-rates, 0-40K range gets taxed 0%, which jumps to 15% after 40K. I assume this number that is taxed is AGI, which is after standard deduction (I think 12K) plus itemized deductions.
See Form 1040: Adjusted Gross Income (AGI) comes before the standard/itemized deduction. Tax brackets refer to taxable income, which comes after the standard/itemized deduction.
Is there any way to minimize federal tax at this withdrawal phase, or even better, make it zero? (I can withdraw the allocations that has a loss instead of gain, that is one way, but for the ones with gains, is there a way to reduce federal taxes?
Easiest way to pay no tax is to have no income. But that's probably not what you had in mind, particularly if you are in the 35% bracket now....
2) State tax: I'm in CA. For finding out how much CA tax I will pay for LTCG, I checked these CA tax brackets here (https://www.tax-brackets.org/californiataxtable), and I see that, even with 45K AGI, I get taxed 8% for any investment I sell, which qualifies for LTCG. I want to avoid this, because, although I will no work for corporate, and work on my own businesses, I may have some side income from other passive income methods (e.g. real estate, which I do't have right now), which can ve me to 8% CA tax bracket. Any recommendations on how to avoid this state tax?
Some comment on AGI/deduction/taxable income as above. To avoid capital gains and the taxes on them, don't sell investments with gains.
3) NIIT: Is there any way to avoid this tax? Would minimizing AGI / income after retirement in 10 years change NIIT amount, or is it flat 3.8% no matter what my AGI is?
Keep AGI under $200K as a single filer.
Please read. I will not be working in corporate after retirement in ~10 years, but I will create my own businesses. So, I won't have W2 income, and I may have business income, which I can invest in the business and avoid taxes (Bezos style, or, you-know-who style). So, there is a chance that I can fall into 0% tax bracket, UNLESS, income from my already-present investments (e.g. gains from 3-fund portfolio sell, company RSU stock sell, or real estate income (e.g.rent). This second part is what I'm asking. How do I avoid being moved to a higher tax bracket when I have no W2 income?
Please understand: your question may be very simple, in which case "don't have more income" is the best answer. Or your question may be very complex, involving arcane strategies for business income and expenses, in which case consultation with a business-savvy CPA is likely the best answer.
"Easiest way to pay no tax is to have no income. " => Thank you for this.
"But that's probably not what you had in mind, particularly if you are in the 35% bracket now...." => That's exactly what I have in mind, dropping from 35% to 0% tax bracket if possible (I will have no W2 income).
Will you have "unavoidable income" such as interest, dividends, and capital gain distributions from your taxable investments?
"Keep AGI under $200K as a single filer." => Does this ensure no NIIT?
Yes.
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

jbrunner wrote: Thu Oct 15, 2020 12:31 pm https://ofm.wa.gov/budget/state-budgets ... ndividuals

Someone posted about WA state having no state tax. The CG tax will be brought up again when the legislature meets in January 2021.
Interesting. So, above those limits in this link (25K capital gains for single), does that mean 9% capital gains tax for WA (as opposed to 0 state tax earlier)? And does that mean that I still pay 15% LTCG tax in addition to this?
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

trueblueky wrote: Thu Oct 15, 2020 12:51 pm
ThisJustIn wrote: Thu Oct 15, 2020 10:39 am
trueblueky wrote: Thu Oct 15, 2020 8:09 am If you know tax rates will be in 10 years, wow!

However, the 2017 tax law has rates returning to their previous levels before that.
Yes, yes, I couldn't add every single caveat to my post, I'm well aware tax brackets do change.
To be clearer, it Congress does nothing, tax rates will revert to pre-2017 law. Standard deduction goes down. Exemptions reappear. 12% becomes 15%. As we get closer, it will become more important to watch that. There will be arbitrage opportunities and pitfalls as we move from new law to old.
Interesting. What are the arbitrage opportunities during this (possible) tax law change?
jebmke
Posts: 11396
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by jebmke »

ThisJustIn wrote: Fri Oct 16, 2020 11:25 am What are the arbitrage opportunities during this (possible) tax law change?
Use a Donor Advised Fund that was funded before 2017 to pay for charitable donations until the rates rise and then either use taxable funds (and deduct on Schedule A) or Qualified Charitable Distributions from RMD, if applicable.
When you discover that you are riding a dead horse, the best strategy is to dismount.
sycamore
Posts: 1209
Joined: Tue May 08, 2018 12:06 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by sycamore »

ThisJustIn wrote: Fri Oct 16, 2020 11:24 am
jbrunner wrote: Thu Oct 15, 2020 12:31 pm https://ofm.wa.gov/budget/state-budgets ... ndividuals

Someone posted about WA state having no state tax. The CG tax will be brought up again when the legislature meets in January 2021.
Interesting. So, above those limits in this link (25K capital gains for single), does that mean 9% capital gains tax for WA (as opposed to 0 state tax earlier)? And does that mean that I still pay 15% LTCG tax in addition to this?
If the proposal became law and I'm reading it correctly...
yes, it would mean 9% on long-term capital gains (> 1 year)
yes, that 9% would be in addition to whatever federal LTCG tax you pay
increment
Posts: 359
Joined: Tue May 15, 2018 2:20 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by increment »

ThisJustIn wrote: Thu Oct 15, 2020 10:47 am
Cyclesafe wrote: Thu Oct 15, 2020 6:13 am Play around with TurboTax. If you don't do your taxes now, buy the software anyway and reproduce your 2019 return. Then make changes to your various inputs to see how your taxes are affected. Just focusing on marginal rates, or worse yet, heuristics, will not yield for you the full impact of the changes you want to understand.

Taxes are generally assessed when and where the income is incurred / realized. Transition years between state residences can sometimes be tricky.

The worse part of NIIT is that the exclusion is not adjusted for inflation. What is annoying now will be downright aggravating in the years ahead.
[...] Could you clarify what you mean by "the exclusion is not adjusted for inflation"?
NIIT is owed if you have (appropriately modified) annual income above $250000. That exclusion amount is not scheduled to increase in future years, even if after inflation $250000 per year is not worth what it used to be.
trueblueky
Posts: 1847
Joined: Tue May 27, 2014 3:50 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by trueblueky »

ThisJustIn wrote: Fri Oct 16, 2020 11:25 am
trueblueky wrote: Thu Oct 15, 2020 12:51 pm
ThisJustIn wrote: Thu Oct 15, 2020 10:39 am
trueblueky wrote: Thu Oct 15, 2020 8:09 am If you know tax rates will be in 10 years, wow!

However, the 2017 tax law has rates returning to their previous levels before that.
Yes, yes, I couldn't add every single caveat to my post, I'm well aware tax brackets do change.
To be clearer, it Congress does nothing, tax rates will revert to pre-2017 law. Standard deduction goes down. Exemptions reappear. 12% becomes 15%. As we get closer, it will become more important to watch that. There will be arbitrage opportunities and pitfalls as we move from new law to old.
Interesting. What are the arbitrage opportunities during this (possible) tax law change?
Current tax law on individuals expires December 31, 2025.

Old law: unlimited deductions for state and local tax.
New law: restricted to $10,000 SALT
In 2026: back to the old law. Recommendation for some would be to push property tax into the next year (easy to do in some states, impossible in others)

Old law: standard deduction for single was about $6,000
New law: $12,000+ (goes up each year with inflation)
In 2026: back to lower standard deduction. This means it will be easier to justify itemizing.

New law increased the threshold for AMT. 2026 reverts, which will catch some people.

In general, lower rates in 2025 than 2026 would encourage getting income sooner, while delaying deductions as explained before.

The 20% adjustment for qualified business income expires. Better to have QBI in 2025.

https://www.jct.gov/publications/2018/jcx-1-18/ from the Joint Committee on Taxation lists expiring provisions.
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

trueblueky wrote: Fri Oct 16, 2020 2:51 pm
ThisJustIn wrote: Fri Oct 16, 2020 11:25 am
trueblueky wrote: Thu Oct 15, 2020 12:51 pm
ThisJustIn wrote: Thu Oct 15, 2020 10:39 am
trueblueky wrote: Thu Oct 15, 2020 8:09 am If you know tax rates will be in 10 years, wow!

However, the 2017 tax law has rates returning to their previous levels before that.
Yes, yes, I couldn't add every single caveat to my post, I'm well aware tax brackets do change.
To be clearer, it Congress does nothing, tax rates will revert to pre-2017 law. Standard deduction goes down. Exemptions reappear. 12% becomes 15%. As we get closer, it will become more important to watch that. There will be arbitrage opportunities and pitfalls as we move from new law to old.
Interesting. What are the arbitrage opportunities during this (possible) tax law change?
Current tax law on individuals expires December 31, 2025.

Old law: unlimited deductions for state and local tax.
New law: restricted to $10,000 SALT
In 2026: back to the old law. Recommendation for some would be to push property tax into the next year (easy to do in some states, impossible in others)

Old law: standard deduction for single was about $6,000
New law: $12,000+ (goes up each year with inflation)
In 2026: back to lower standard deduction. This means it will be easier to justify itemizing.

New law increased the threshold for AMT. 2026 reverts, which will catch some people.

In general, lower rates in 2025 than 2026 would encourage getting income sooner, while delaying deductions as explained before.

The 20% adjustment for qualified business income expires. Better to have QBI in 2025.

https://www.jct.gov/publications/2018/jcx-1-18/ from the Joint Committee on Taxation lists expiring provisions.
Interesting, this is good to know.
Looks like 2025-2026 will be a good time to move from corporate W2 job to starting own businesses and making use of possible deductions (unless tax laws are overridden by then).
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

FiveK wrote: Thu Oct 15, 2020 2:44 pm
ThisJustIn wrote: Thu Oct 15, 2020 10:45 am
FiveK wrote: Thu Oct 15, 2020 3:23 am
ThisJustIn wrote: Thu Oct 15, 2020 2:37 am 1) Federal tax: Checking these LTCG tax brackets https://www.nerdwallet.com/article/taxe ... -tax-rates, 0-40K range gets taxed 0%, which jumps to 15% after 40K. I assume this number that is taxed is AGI, which is after standard deduction (I think 12K) plus itemized deductions.
See Form 1040: Adjusted Gross Income (AGI) comes before the standard/itemized deduction. Tax brackets refer to taxable income, which comes after the standard/itemized deduction.
Is there any way to minimize federal tax at this withdrawal phase, or even better, make it zero? (I can withdraw the allocations that has a loss instead of gain, that is one way, but for the ones with gains, is there a way to reduce federal taxes?
Easiest way to pay no tax is to have no income. But that's probably not what you had in mind, particularly if you are in the 35% bracket now....
2) State tax: I'm in CA. For finding out how much CA tax I will pay for LTCG, I checked these CA tax brackets here (https://www.tax-brackets.org/californiataxtable), and I see that, even with 45K AGI, I get taxed 8% for any investment I sell, which qualifies for LTCG. I want to avoid this, because, although I will no work for corporate, and work on my own businesses, I may have some side income from other passive income methods (e.g. real estate, which I do't have right now), which can ve me to 8% CA tax bracket. Any recommendations on how to avoid this state tax?
Some comment on AGI/deduction/taxable income as above. To avoid capital gains and the taxes on them, don't sell investments with gains.
3) NIIT: Is there any way to avoid this tax? Would minimizing AGI / income after retirement in 10 years change NIIT amount, or is it flat 3.8% no matter what my AGI is?
Keep AGI under $200K as a single filer.
Please read. I will not be working in corporate after retirement in ~10 years, but I will create my own businesses. So, I won't have W2 income, and I may have business income, which I can invest in the business and avoid taxes (Bezos style, or, you-know-who style). So, there is a chance that I can fall into 0% tax bracket, UNLESS, income from my already-present investments (e.g. gains from 3-fund portfolio sell, company RSU stock sell, or real estate income (e.g.rent). This second part is what I'm asking. How do I avoid being moved to a higher tax bracket when I have no W2 income?
Please understand: your question may be very simple, in which case "don't have more income" is the best answer. Or your question may be very complex, involving arcane strategies for business income and expenses, in which case consultation with a business-savvy CPA is likely the best answer.
"Easiest way to pay no tax is to have no income. " => Thank you for this.
"But that's probably not what you had in mind, particularly if you are in the 35% bracket now...." => That's exactly what I have in mind, dropping from 35% to 0% tax bracket if possible (I will have no W2 income).
Will you have "unavoidable income" such as interest, dividends, and capital gain distributions from your taxable investments?
"Keep AGI under $200K as a single filer." => Does this ensure no NIIT?
Yes.
Got it, " consultation with a business-savvy CPA is likely the best answer" is a good suggestion, as I'm looking for suggestions on strategies for business income and expenses.

"Will you have "unavoidable income" such as interest, dividends, and capital gain distributions from your taxable investments?" => Yes I will, most surely I will. My 3-fund portfolio in taxable account will generate dividend and capital gains. My RSUs (in case I don't sell all by that time), generate dividends. So, unavoidable income will be there, yes.
User avatar
FiveK
Posts: 10290
Joined: Sun Mar 16, 2014 2:43 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by FiveK »

ThisJustIn wrote: Fri Oct 16, 2020 3:20 pm Got it, " consultation with a business-savvy CPA is likely the best answer" is a good suggestion, as I'm looking for suggestions on strategies for business income and expenses.

"Will you have "unavoidable income" such as interest, dividends, and capital gain distributions from your taxable investments?" => Yes I will, most surely I will. My 3-fund portfolio in taxable account will generate dividend and capital gains. My RSUs (in case I don't sell all by that time), generate dividends. So, unavoidable income will be there, yes.
While there are ways of Paying Zero Income Tax on $100,000 Income? Really? Let's see if we can give new life to this old topic! - Bogleheads.org, that is not common. But even 10% or 12% or 15% isn't bad compared with 35% - good luck!
User avatar
Eagle33
Posts: 928
Joined: Wed Aug 30, 2017 3:20 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by Eagle33 »

ThisJustIn wrote: Fri Oct 16, 2020 3:17 pm
trueblueky wrote: Fri Oct 16, 2020 2:51 pm Interesting, this is good to know.
Looks like 2025-2026 will be a good time to move from corporate W2 job to starting own businesses and making use of possible deductions (unless tax laws are overridden by then).
Remember that your payroll taxes will increase from 7.65% W2 employee to 15.3% self-employed.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

ThisJustIn wrote: Fri Oct 16, 2020 3:17 pm Interesting, this is good to know.
Looks like 2025-2026 will be a good time to move from corporate W2 job to starting own businesses and making use of possible deductions (unless tax laws are overridden by then).
Remember that your payroll taxes will increase from 7.65% W2 employee to 15.3% self-employed.
What exactly is this "payroll tax"? I heard federal tax, state tax, local tax, but not payroll tax.
Also are you saying this tax increase to 15.3% in 2025-2026?
marcopolo
Posts: 3469
Joined: Sat Dec 03, 2016 10:22 am

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by marcopolo »

ThisJustIn wrote: Sat Oct 17, 2020 3:17 am
ThisJustIn wrote: Fri Oct 16, 2020 3:17 pm Interesting, this is good to know.
Looks like 2025-2026 will be a good time to move from corporate W2 job to starting own businesses and making use of possible deductions (unless tax laws are overridden by then).
Remember that your payroll taxes will increase from 7.65% W2 employee to 15.3% self-employed.
What exactly is this "payroll tax"? I heard federal tax, state tax, local tax, but not payroll tax.
Also are you saying this tax increase to 15.3% in 2025-2026?

Payroll taxes are your Social Security and Medicare taxes.

While you are W2 employed, you pay half of it (7.65% up to certain income threshold), and your employer pays another 7.65% on your behalf.

When you are self employed (running your own business), you are both the employee and the employer, so you pay the entire 15.3%
Once in a while you get shown the light, in the strangest of places if you look at it right.
sycamore
Posts: 1209
Joined: Tue May 08, 2018 12:06 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by sycamore »

marcopolo wrote: Sat Oct 17, 2020 3:33 am
ThisJustIn wrote: Sat Oct 17, 2020 3:17 am
ThisJustIn wrote: Fri Oct 16, 2020 3:17 pm Interesting, this is good to know.
Looks like 2025-2026 will be a good time to move from corporate W2 job to starting own businesses and making use of possible deductions (unless tax laws are overridden by then).
Remember that your payroll taxes will increase from 7.65% W2 employee to 15.3% self-employed.
What exactly is this "payroll tax"? I heard federal tax, state tax, local tax, but not payroll tax.
Also are you saying this tax increase to 15.3% in 2025-2026?

Payroll taxes are your Social Security and Medicare taxes.

While you are W2 employed, you pay half of it (7.65% up to certain income threshold), and your employer pays another 7.65% on your behalf.

When you are self employed (running your own business), you are both the employee and the employer, so you pay the entire 15.3%
+1

Payroll tax is also known as "FICA tax", which may be what you see on your paystub. What does your paystub say?
Spirit Rider
Posts: 13452
Joined: Fri Mar 02, 2007 2:39 pm

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by Spirit Rider »

ThisJustIn wrote: Thu Oct 15, 2020 10:45 am Please read. I will not be working in corporate after retirement in ~10 years, but I will create my own businesses. So, I won't have W2 income, and I may have business income, which I can invest in the business and avoid taxes (Bezos style, or, you-know-who style). So, there is a chance that I can fall into 0% tax bracket.
That is not how most small business taxation works. The two most common small business entity types are a sole proprietorship or an S-Corp. They only way to retain profits is to use a C-Corp. Which is rarely beneficial for a one person business.

Both of these are pass-thru business entities, where all business profits pass thru to the taxpayer's personal Form 1040 tax return. It doesn't matter if the business profits remain in the business or not. They are still taxable.

A self-employed individual files Schedules C (business profit) and Schedule SE (self-employment taxes). The former increases your AGI taxable income and the latter as has already been mentioned is an additional 15.3% of the first $137,700 (2020). Their employer contribution will be based on the business profit - 1/2 SE tax. Their 20% QBI deduction will be based on that number - the self-employed health insurance deduction - pre-tax employee deferrals and employer retirement plan contributions.

An S-Corp 2% shareholder employee must pay themselves reasonable compensation as W-2 wages. The W-2 wages are subject to 7.65% FICA taxes on bother the employee and the employer. The result is the same 15.3% up to the same limit. The remaining profit is paid out as S-Corp distributions taxable on your personal Form 1040 tax return. The trade-off is that the S-Corp's 2% employee's employer retirement contribution and 20% QBI deduction will be significantly less.

While a C-Corp can retain business profits to a degrees b(there are rules). They will be subject to double taxation on business profits in W-2 wages and dividends. Not to mention, a C-Corp is not eligible for the QBI deduction.

There is no way to avoid paying the tax man on business profits. An S/C-Corp can somewhat reduce FICA taxes, but at the cost of reduced employer retirement plan contributions. They will also have a reduced/no QBI deduction. A C-Corp can somewhat defer the taxes on profits, but the tax-man will ultimately get his due.

Your plan is not the panacea you think it is.
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

marcopolo wrote: Sat Oct 17, 2020 3:33 am
ThisJustIn wrote: Sat Oct 17, 2020 3:17 am
ThisJustIn wrote: Fri Oct 16, 2020 3:17 pm Interesting, this is good to know.
Looks like 2025-2026 will be a good time to move from corporate W2 job to starting own businesses and making use of possible deductions (unless tax laws are overridden by then).
Remember that your payroll taxes will increase from 7.65% W2 employee to 15.3% self-employed.
What exactly is this "payroll tax"? I heard federal tax, state tax, local tax, but not payroll tax.
Also are you saying this tax increase to 15.3% in 2025-2026?

Payroll taxes are your Social Security and Medicare taxes.

While you are W2 employed, you pay half of it (7.65% up to certain income threshold), and your employer pays another 7.65% on your behalf.

When you are self employed (running your own business), you are both the employee and the employer, so you pay the entire 15.3%
Got it, thanks, this is good to know. Yes, I do see SS tax + Medicare tax breakdown in my paystubs.
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

sycamore wrote: Sat Oct 17, 2020 6:23 am
marcopolo wrote: Sat Oct 17, 2020 3:33 am
ThisJustIn wrote: Sat Oct 17, 2020 3:17 am
ThisJustIn wrote: Fri Oct 16, 2020 3:17 pm Interesting, this is good to know.
Looks like 2025-2026 will be a good time to move from corporate W2 job to starting own businesses and making use of possible deductions (unless tax laws are overridden by then).
Remember that your payroll taxes will increase from 7.65% W2 employee to 15.3% self-employed.
What exactly is this "payroll tax"? I heard federal tax, state tax, local tax, but not payroll tax.
Also are you saying this tax increase to 15.3% in 2025-2026?

Payroll taxes are your Social Security and Medicare taxes.

While you are W2 employed, you pay half of it (7.65% up to certain income threshold), and your employer pays another 7.65% on your behalf.

When you are self employed (running your own business), you are both the employee and the employer, so you pay the entire 15.3%
+1

Payroll tax is also known as "FICA tax", which may be what you see on your paystub. What does your paystub say?
I do see SS tax + Medicare tax breakdown in my paystubs.
Topic Author
ThisJustIn
Posts: 382
Joined: Sun Mar 11, 2018 10:53 pm
Location: Sunnyvale, CA
Contact:

Re: Long-term capital gains: Federal tax, state tax, NIIT

Post by ThisJustIn »

Spirit Rider wrote: Sat Oct 17, 2020 6:53 am
ThisJustIn wrote: Thu Oct 15, 2020 10:45 am Please read. I will not be working in corporate after retirement in ~10 years, but I will create my own businesses. So, I won't have W2 income, and I may have business income, which I can invest in the business and avoid taxes (Bezos style, or, you-know-who style). So, there is a chance that I can fall into 0% tax bracket.
That is not how most small business taxation works. The two most common small business entity types are a sole proprietorship or an S-Corp. They only way to retain profits is to use a C-Corp. Which is rarely beneficial for a one person business.

Both of these are pass-thru business entities, where all business profits pass thru to the taxpayer's personal Form 1040 tax return. It doesn't matter if the business profits remain in the business or not. They are still taxable.

A self-employed individual files Schedules C (business profit) and Schedule SE (self-employment taxes). The former increases your AGI taxable income and the latter as has already been mentioned is an additional 15.3% of the first $137,700 (2020). Their employer contribution will be based on the business profit - 1/2 SE tax. Their 20% QBI deduction will be based on that number - the self-employed health insurance deduction - pre-tax employee deferrals and employer retirement plan contributions.

An S-Corp 2% shareholder employee must pay themselves reasonable compensation as W-2 wages. The W-2 wages are subject to 7.65% FICA taxes on bother the employee and the employer. The result is the same 15.3% up to the same limit. The remaining profit is paid out as S-Corp distributions taxable on your personal Form 1040 tax return. The trade-off is that the S-Corp's 2% employee's employer retirement contribution and 20% QBI deduction will be significantly less.

While a C-Corp can retain business profits to a degrees b(there are rules). They will be subject to double taxation on business profits in W-2 wages and dividends. Not to mention, a C-Corp is not eligible for the QBI deduction.

There is no way to avoid paying the tax man on business profits. An S/C-Corp can somewhat reduce FICA taxes, but at the cost of reduced employer retirement plan contributions. They will also have a reduced/no QBI deduction. A C-Corp can somewhat defer the taxes on profits, but the tax-man will ultimately get his due.

Your plan is not the panacea you think it is.
Got it, yes, there is so much more I need to learn, and I'm taking it easy, as I have at least 5 years ahead of me. I do know LLCs, S-corps, but I thought investing profits into business would be an easy way to grow capital for the growth of the business. It looks like there is more to it. I think I need a CPA. I will also read your post again in detail again, thanks for the great summary (which, I know is only part of the picture, and I will need to do more to learn).
Post Reply