Long-term capital gains on sale of index funds

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Topic Author
ian_in_japan
Posts: 16
Joined: Tue Feb 07, 2017 7:56 pm

Long-term capital gains on sale of index funds

Post by ian_in_japan »

I’m a US citizen and long-term Japan resident (over 10 years) looking to sell some of my poorly performing Vanguard index funds and use that money to buy more of the better performers.

I have eight funds in total ranging in performance from a 3.3% return rate to a 12.4% return rate. Advice I've read seems to indicate holding three or four funds (e.g., total US stock market, all-world ex US, total US bond market, and maybe a REIT fund) is probably sufficient diversification.

My understanding is that on the US side if I sell I’m subject to long-term capital gains taxes on the investment returns at a tax rate of either 0%, 15%, or 20%, depending on my income. I think I’d be taxed at 0% because I use the Foreign Earned Income Exclusion (FEIE) to effectively make my US income $0. In other words, I think I should be able to sell index funds up to the point their investment returns total the maximum income I can have that still allows me to pay 0% in capital gains taxes (which I think is $44,625 for single people) and therefore pay $0 to the IRS.

Example: I sell one low performer whose total investment returns have been $6,000, resulting in a total income of $6,000 (since my wages are "wiped" out by taking the FEIE). This is less than $44,625 so I'd be taxed at a rate of 0% for those capital gains and wind up paying $0 in US taxes.

Can anyone more knowledgeable than me (likely everyone on this forum lol) confirm whether my above understanding is correct? Thanks!
livesoft
Posts: 86736
Joined: Thu Mar 01, 2007 7:00 pm

Re: Long-term capital gains on sale of index funds

Post by livesoft »

How about filling out a mock tax return with your tax-prep software and add some fund sales to see what happens?
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Topic Author
ian_in_japan
Posts: 16
Joined: Tue Feb 07, 2017 7:56 pm

Re: Long-term capital gains on sale of index funds

Post by ian_in_japan »

That's a good idea. Thanks.
Topic Author
ian_in_japan
Posts: 16
Joined: Tue Feb 07, 2017 7:56 pm

Re: Long-term capital gains on sale of index funds

Post by ian_in_japan »

This seems to shed some light on the issue: https://www.reddit.com/r/USExpatTaxes/c ... r_capital/
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