Weighing 0% LTCG rates versus tax-exempt munis.

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Topic Author
shess
Posts: 242
Joined: Wed May 17, 2017 12:02 am

Weighing 0% LTCG rates versus tax-exempt munis.

Post by shess » Thu Nov 07, 2019 2:43 pm

I'm trying to figure out how to weigh the value of a tax-exempt muni fund I've held for awhile, when I'm also trying to pay 0% federal taxes. So far I have two obvious conclusions which don't agree with each other.

Background:
- retired, MFJ, kid at home, kid in college (AOTC).
- no W2 income, living on dividends and sale of shares with LTCG.
- ~$60k qualified dividend income, ~$20k non-qualified dividend income and interest.
- $1600 from a CA-exempt muni fund I bought as backup cash reserves back when I had substantial W-2 income.
- $10k SALT deduction, plus ~$35k health insurance and medical costs deduction (above the 10% limit).

Right now, I've penciled things out and figured out that I can realize a fair amount of LTCG for 0%, and in fact get $1k back for refundable AOTC due to the college kid.

So, obvious conclusion #1 is that the CA-exempt fund is dumb, since it's saving me 0% at the federal level, which was the main goal. On straight after-tax yield, a comparable US Treasury fund or a CD is a better choice.

But, the other obvious conclusion is that the CA-exempt fund's income doesn't fall to AGI, which impacts the AOTC phaseout (starting at $160k), so it has value. I _think_ it should be valued at whatever rate I'll pay on LTCG when I exceed the threshold, which is kind of all over the map (*).

Has anyone already thought this through enough to have a sense of direction? Thanks.

(*) As AGI increases, the marginal LTCG rate seems to be like 5%, then 22%, then 29%, then falls back to 16.5% for awhile. I think the 16.5% region is the medical-cost deduction's 10% limit plus 15% LTCG rates. A bunch of the difference is AOTC phase-out, but I think there's something else in there I haven't teased out, yet.

MFJ - married filing jointly
LTCG - Long term capital gains
AOTC - American Opportunity Tax Credit

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FiveK
Posts: 7741
Joined: Sun Mar 16, 2014 2:43 pm

Re: Weighing 0% LTCG rates versus tax-exempt munis.

Post by FiveK » Thu Nov 07, 2019 8:26 pm

shess wrote:
Thu Nov 07, 2019 2:43 pm
(*) As AGI increases, the marginal LTCG rate seems to be like 5%, then 22%, then 29%, then falls back to 16.5% for awhile. I think the 16.5% region is the medical-cost deduction's 10% limit plus 15% LTCG rates. A bunch of the difference is AOTC phase-out, but I think there's something else in there I haven't teased out, yet.
The personal finance toolbox Excel spreadsheet will show marginal rate charts for various types of income, holding other types fixed. It doesn't have enough Artificial Intelligence to provide text describing why the rates are what they are.

Do you have significant traditional (401k, IRA, etc.) funds? It can be better, long term, to convert at low (e.g., 10%, 12% federal) rates now if RMDs would have you paying the same or higher rates later.

Topic Author
shess
Posts: 242
Joined: Wed May 17, 2017 12:02 am

Re: Weighing 0% LTCG rates versus tax-exempt munis.

Post by shess » Thu Nov 07, 2019 11:59 pm

FiveK wrote:
Thu Nov 07, 2019 8:26 pm
shess wrote:
Thu Nov 07, 2019 2:43 pm
(*) As AGI increases, the marginal LTCG rate seems to be like 5%, then 22%, then 29%, then falls back to 16.5% for awhile. I think the 16.5% region is the medical-cost deduction's 10% limit plus 15% LTCG rates. A bunch of the difference is AOTC phase-out, but I think there's something else in there I haven't teased out, yet.
The personal finance toolbox Excel spreadsheet will show marginal rate charts for various types of income, holding other types fixed. It doesn't have enough Artificial Intelligence to provide text describing why the rates are what they are.
OK, I think I found the graph on the Calculations page, but it looks like OpenOffice doesn't support whatever is going on in there with an inscrutable message. Maybe I can try it in the office.com version ... nope. The "Update" button doesn't even appear.

OpenOffice message: "A Scripting Framework error occurred while running the UNKNOWN script UNKNOWN. Message:Incorrect format for Script URI:", with no URI given. So OpenOffice is pretty far off the edge of the world at that point :-).
FiveK wrote:
Thu Nov 07, 2019 8:26 pm
Do you have significant traditional (401k, IRA, etc.) funds? It can be better, long term, to convert at low (e.g., 10%, 12% federal) rates now if RMDs would have you paying the same or higher rates later.
I do have 401k and IRA plans which would like to be converted, still working that out. Given our healthcare costs, and that we currently live in a high-cost area, for now we might need to hold on to at least some of those stock sales. I just dug up an RMD calculator, and ... oof. Well, I've got 20 years to work on it.

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FiveK
Posts: 7741
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Re: Weighing 0% LTCG rates versus tax-exempt munis.

Post by FiveK » Fri Nov 08, 2019 12:45 am

shess wrote:
Thu Nov 07, 2019 11:59 pm
OpenOffice message: "A Scripting Framework error occurred while running the UNKNOWN script UNKNOWN. Message:Incorrect format for Script URI:", with no URI given. So OpenOffice is pretty far off the edge of the world at that point :-).
Definitely off the edge of the world I inhabit. :?

Both for that spreadsheet and the Retiree Portfolio Model it seems Excel just does more than other tools such as Google Sheets, LibreOffice, and apparently (from your description) OpenOffice....

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