Help understanding 0 capital gains tax (15% tax Bracket)

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crake
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Help understanding 0 capital gains tax (15% tax Bracket)

Post by crake » Wed Aug 07, 2013 8:38 am

I've heard of the no capital gains tax for people in the 15% tax bracket but only recently started to try to under stand the implications. I have a few questions in some areas where I think I may be missing some details.

1) I am planning on being in the 15% tax bracket in retirement but am currently in the 25% bracket. Assuming those things remain true the only benefit a Roth account is giving me is not having to pay taxes on dividends. Assuming my holdings are 100% Vanguard total market this is saving me about .5% per year. (~2% div yeild times 25% taxes.) If I ever dipped down to the 15% bracket there would no benefit to contributing to a Roth. Is this correct?

2) In a taxable account is there anything preventing people from taking cap gains until they reach the 15% tax bracket and then immediately buying back to increase their cost basis? Is anyone utilizing this strategy?

scrabbler1
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by scrabbler1 » Wed Aug 07, 2013 8:50 am

crake wrote:I've heard of the no capital gains tax for people in the 15% tax bracket but only recently started to try to under stand the implications. I have a few questions in some areas where I think I may be missing some details.

2) In a taxable account is there anything preventing people from taking cap gains until they reach the 15% tax bracket and then immediately buying back to increase their cost basis? Is anyone utilizing this strategy?
I can't say about your first question (which I did not quote) but I can tell you that wash sales don't apply to taking gains, only to taking losses. While most of the rebalancing in the last 4 years has been in my IRA, when I have done some rare rebalancing (i.e. taking gains) in my taxable accounts some but not all of those gains were in the 0% (federal only; still taxable on the state level) bracket which lessened the effect of the rebalancing. I don't think it is a bad tactic.

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auntie
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by auntie » Wed Aug 07, 2013 9:57 am

crake wrote: 2) In a taxable account is there anything preventing people from taking cap gains until they reach the 15% tax bracket and then immediately buying back to increase their cost basis? Is anyone utilizing this strategy?
I'm usually in a low bracket, and every year in December I figure our how much gain I can take without paying tax, and then buy it back immediately. It's nice to increase the cost basis.
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neoptolemus412
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by neoptolemus412 » Wed Aug 07, 2013 11:02 am

Yes, if you're taxable income for the year falls into the 15% tax bracket, long-term capital gains taxes are not incurred.

1) Yes & no. You haven't given a time horizon, total assets, asset allocation, and overall lifestyle to appropriately assess whether a Roth is a good idea. Roth's are about shifting the tax burden to present dollars vs. future dollars. If you are certain you'll be in a 15% tax bracket in retirement, then contributing to a traditional IRA while you're in a 25% tax bracket makes sense. You just choose to pay the tax when your tax rate is lowest. The caveat to all of this is your time horizon. If you're 25 and in a 25% tax bracket, it doesn't make sense to forgo 40 years of tax free growth simply b/c you plan to be in a lower tax bracket at retirement. Ultimately, the best part of a Roth is managing your tax bill in retirement. Ideally, a Roth is the last money one taps, but it can aid in keeping your federal taxes at a minimum.

2) A wash sale would prevent you from taking a loss on the same security over a 30 day pre/post trade date. It simply stops you from taking a capital loss on securities, then trying to repurchase the same securities to change your basis. Your technique is why such rules are in place. It’s usually not too significant, unless you deal in a very volatile security that has great swings over a short period of time.

thx1138
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by thx1138 » Wed Aug 07, 2013 11:16 am

neoptolemus412 wrote:Yes, if you're taxable income for the year falls into the 15% tax bracket, long-term capital gains taxes are not incurred.
2) A wash sale would prevent you from taking a loss on the same security over a 30 day pre/post trade date. It simply stops you from taking a capital loss on securities, then trying to repurchase the same securities to change your basis. Your technique is why such rules are in place. It’s usually not too significant, unless you deal in a very volatile security that has great swings over a short period of time.
He's taking a gain, not a loss. Wash sale rules don't apply to gains.

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House Blend
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by House Blend » Wed Aug 07, 2013 1:15 pm

crake wrote:1) I am planning on being in the 15% tax bracket in retirement but am currently in the 25% bracket. Assuming those things remain true the only benefit a Roth account is giving me is not having to pay taxes on dividends. Assuming my holdings are 100% Vanguard total market this is saving me about .5% per year. (~2% div yeild times 25% taxes.) If I ever dipped down to the 15% bracket there would no benefit to contributing to a Roth. Is this correct?
Once you start collecting SS benefits, you can still end up with an effective nonzero tax rate on qualified dividends and LTCG.

Example: if you are in the range where each additional dollar of "other" income exposes another $.50 of SS to income tax, then your 15% bracketeer could be effectively paying 7.5% on QDI+LTCG. Tax-exempt bonds aren't tax-free in this scenario either.

Also, when comparing Roth vs. taxable, don't forget about state taxes. I think most states like to tax dividends and cap gains at the same rate as all other income.
2) In a taxable account is there anything preventing people from taking cap gains until they reach the 15% tax bracket and then immediately buying back to increase their cost basis? Is anyone utilizing this strategy?
There's an active thread on this topic:
http://www.bogleheads.org/forum/viewtop ... 1&t=121061

neoptolemus412
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by neoptolemus412 » Wed Aug 07, 2013 2:34 pm

thx1138 wrote:
neoptolemus412 wrote:Yes, if you're taxable income for the year falls into the 15% tax bracket, long-term capital gains taxes are not incurred.
2) A wash sale would prevent you from taking a loss on the same security over a 30 day pre/post trade date. It simply stops you from taking a capital loss on securities, then trying to repurchase the same securities to change your basis. Your technique is why such rules are in place. It’s usually not too significant, unless you deal in a very volatile security that has great swings over a short period of time.
He's taking a gain, not a loss. Wash sale rules don't apply to gains.
Understood he's taking a gain. Just wanted to make clear the risks involved with trading the same security over a short window.

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ObliviousInvestor
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by ObliviousInvestor » Wed Aug 07, 2013 3:52 pm

crake wrote:In a taxable account is there anything preventing people from taking cap gains until they reach the 15% tax bracket and then immediately buying back to increase their cost basis?
I know of at least one tax professional who recommends against buying back immediately, because he thinks the economic substance doctrine should apply in such situations.
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manwithnoname
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by manwithnoname » Wed Aug 07, 2013 4:45 pm

ObliviousInvestor wrote:
crake wrote:In a taxable account is there anything preventing people from taking cap gains until they reach the 15% tax bracket and then immediately buying back to increase their cost basis?
I know of at least one tax professional who recommends against buying back immediately, because he thinks the economic substance doctrine should apply in such situations.
1. Who is the tax professional who made such a recommendation and what precedent is he relying upon? Anyone can make a statement that any transaction could hypothetically violate the tax law, e.g., selling stocks to create a capital loss at year to eliminate capital gain is a violation of the step transaction doctrine and the economic substance doctrine. But the IRS has never applied either rule.

2. How does a taxpayer know when is the economic substance doctrine is relevant to a particular transaction or is this a case of the IRS agent declaring "I know it when I see it."

3. How does the IRS ever know if a transaction subject to subsection (o) has occurred.

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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by ObliviousInvestor » Wed Aug 07, 2013 4:53 pm

manwithnoname wrote:Who is the tax professional who made such a recommendation and what precedent is he relying upon?
I'm not going to name the person, of course. (If you're concerned about his qualifications, he's a CPA with an MST, who is a partner at a mid-size regional firm.) As far as precedent, I have no idea. The conversation was in person, and I didn't pursue it.
manwithnoname wrote:How does a taxpayer know when is the economic substance doctrine is relevant to a particular transaction
I wish I had an answer.
Mike Piper, author/blogger

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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by manwithnoname » Wed Aug 07, 2013 5:04 pm

ObliviousInvestor wrote:
manwithnoname wrote:Who is the tax professional who made such a recommendation and what precedent is he relying upon?
I'm not going to name the person, of course. (If you're concerned about his qualifications, he's a CPA with an MST, who is a partner at a mid-size regional firm.) As far as precedent, I have no idea. The conversation was in person, and I didn't pursue it.
manwithnoname wrote:How does a taxpayer know when is the economic substance doctrine is relevant to a particular transaction
I wish I had an answer.
Being a CPA and having a MST Don't impress me much. As for #2, you gave an honest answer which is why the IRS is not going to enforce the economic substance doctrine against a taxpayer if it cannot define how it applies to a particular transaction, any more than it would apply the step transaction doctrine to a back door Roth conversion by taxpayers whose AGI makes them ineligible to make a Roth Contribution.

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cheese_breath
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by cheese_breath » Wed Aug 07, 2013 5:16 pm

The 0% tax only applies to long term capital gains and qualified dividends, not short term gains and non-qualified dividends.

Some funds have restrictions that prevent you from buying back into them for a set time after you sell them. For example the Vanguard TSM makes you wait 60 days from the sale date before you can buy back in. But that doesn’t mean you can’t buy a similar fund, Vanguard S&P 500 for example.

If you suspect RMDs might push you into a higher tax bracket in the future, converting some of your TIRA funds to Roths before you reach 70 will lessen the amount subject to RMDs.
The surest way to know the future is when it becomes the past.

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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by manwithnoname » Wed Aug 07, 2013 5:21 pm

cheese_breath wrote:The 0% tax only applies to long term capital gains and qualified dividends, not short term gains and non-qualified dividends.

Some funds have restrictions that prevent you from buying back into them for a set time after you sell them. For example the Vanguard TSM makes you wait 60 days from the sale date before you can buy back in. But that doesn’t mean you can’t buy a similar fund, Vanguard S&P 500 for example.

If you suspect RMDs might push you into a higher tax bracket in the future, converting some of your TIRA funds to Roths before you reach 70 will lessen the amount subject to RMDs.
+1

Or invest taxable funds in investment classes that are not taxable such as MLP or muni bonds to lower taxable income.

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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by grabiner » Wed Aug 07, 2013 9:56 pm

cheese_breath wrote:Some funds have restrictions that prevent you from buying back into them for a set time after you sell them. For example the Vanguard TSM makes you wait 60 days from the sale date before you can buy back in.
You can get around this by making either half of the transaction by mail; you can sell by mail and then buy back online, or vice versa. (I have done this several times with tax-loss harvests, when I wanted to be out of the fund for 31 days, and needed to sell by mail anyway because that was the only way to specifically identify which shares to sell at the time.)
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robertalpert
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by robertalpert » Wed Aug 07, 2013 10:09 pm

Wiki article about capital gains harvesting (for those in 15% tax bracket)

http://www.bogleheads.org/wiki/Tax_gain_harvesting

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kramer
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by kramer » Thu Aug 08, 2013 12:54 am

2) In a taxable account is there anything preventing people from taking cap gains until they reach the 15% tax bracket and then immediately buying back to increase their cost basis? Is anyone utilizing this strategy?
I early retired in 2007 without a pension and my only income since then has been dividends and capital gains. I have been using this strategy since 2008 when the 0% cap gains and 0% qualified dividends brackets came into being. I am mostly rebalancing, so I am not necessarily buying back the same thing right away.

I have an additional advantage in that I live overseas and incur no state income taxes nor will I be mandated to participate in the new health care exchanges (being exempt as an expat) so I am not concerned about health insurance subsidies I would lose by showing higher income.

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frugaltype
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by frugaltype » Thu Aug 08, 2013 4:39 am

kramer wrote:
I have an additional advantage in that I live overseas and incur no state income taxes nor will I be mandated to participate in the new health care exchanges (being exempt as an expat) so I am not concerned about health insurance subsidies I would lose by showing higher income.
What do you do about paying for healthcare overseas? Do you qualify for government coverage from the country you live in? I have not figured out how overseas national healthcare plans work for visitors.

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kramer
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by kramer » Thu Aug 08, 2013 5:30 am

frugaltype wrote:
kramer wrote:
I have an additional advantage in that I live overseas and incur no state income taxes nor will I be mandated to participate in the new health care exchanges (being exempt as an expat) so I am not concerned about health insurance subsidies I would lose by showing higher income.
What do you do about paying for healthcare overseas? Do you qualify for government coverage from the country you live in? I have not figured out how overseas national healthcare plans work for visitors.
I have opted to pay cash. Unless you get an international policy from a developed country, you are usually only covered for one event anyway (e.g., after you get sick you can't renew or your rates rise dramatically). Also, I want to be able to access the best health care, not average health care, where I live (or wherever I am traveling).

I do buy temporary insurance for visits back to the USA. I did keep my USA health insurance for 5.5 years after retiring until I was sure I would be living overseas for some time. If you are living overseas, you are probably not even eligible for a regular USA health insurance policy due to residency rules.

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wshang
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by wshang » Thu Aug 08, 2013 11:27 pm

Have you considered using muni bond income or exceeding the 15% bracket in every other years. In other words, every couple of years, commit to overshoot the 15% bracket, sell enough equities to have enough cash to supplement your needs in subsequent years to stay below the 15% bracket. If you designate individual lot of shares to sell, you might also be able to stretch this strategy.

See here:
https://www.gainskeeper.com/siebert/siebert_fund.htm
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by Electron » Fri Aug 09, 2013 12:37 am

Keep in mind that the 0% bracket for capital gains and qualified dividends only applies to any space left over in the 15% bracket. The first dollars that go into the bracket are ordinary income after deductions and exemptions. If the 15% bracket is completely filled up with ordinary income and capital gains, any additional ordinary income would push capital gains out. Those would then be taxed at a minimum of 15%.

However, there is an interesting effect associated with this. Additional ordinary income might appear to be taxed at 25% or 30%. The incremental ordinary income gets taxed at 10% or 15%, and the same dollar amount of capital gains moves from 0% to 15%.
Electron

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JoMoney
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by JoMoney » Fri Aug 09, 2013 1:27 am

crake wrote:...I am planning on being in the 15% tax bracket in retirement but am currently in the 25% bracket. Assuming those things remain true the only benefit a Roth account is giving me is not having to pay taxes on dividends.
Keep in mind you're also "assuming" that tax law stays the same. Capital gains tax rates have not always been as low as they are today. I think Congress would have an easier time changing the "Long Term Capital Gains" rate then they would renege on the ROTH. If you're not doing a traditional IRA for the tax deduction, what do you have to lose by not putting the money in the ROTH???

There are other benefits to having money in a tax sheltered account. What if you want to change what funds, ETF's, etc.. that you're invested in? You'll have to pay taxes when you exchange. Some people like the (possible) protection from liability claims of creditors, or the ability to pass the money to an heir outside of probate. There are lots of other benefits for using the IRA.

http://en.wikipedia.org/wiki/Capital_ga ... ted_States (read the "history" and look at some of the prior years)
http://en.wikipedia.org/wiki/Bush_tax_cuts (think about if Congress didn't "Renew" the cuts for this year)
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yukon50
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Re: Help understanding 0 capital gains tax (15% tax Bracket)

Post by yukon50 » Fri Aug 09, 2013 9:06 am

kramer wrote:
frugaltype wrote:
kramer wrote:
I have an additional advantage in that I live overseas and incur no state income taxes nor will I be mandated to participate in the new health care exchanges (being exempt as an expat) so I am not concerned about health insurance subsidies I would lose by showing higher income.
What do you do about paying for healthcare overseas? Do you qualify for government coverage from the country you live in? I have not figured out how overseas national healthcare plans work for visitors.
I have opted to pay cash. Unless you get an international policy from a developed country, you are usually only covered for one event anyway (e.g., after you get sick you can't renew or your rates rise dramatically). Also, I want to be able to access the best health care, not average health care, where I live (or wherever I am traveling).

I do buy temporary insurance for visits back to the USA. I did keep my USA health insurance for 5.5 years after retiring until I was sure I would be living overseas for some time. If you are living overseas, you are probably not even eligible for a regular USA health insurance policy due to residency rules.
How does the Visa process work? How long can you stay?

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