Which is the Most Tax-Efficient Method to Increase Your Cash Position?

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joer1212
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Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Wed Oct 11, 2017 6:17 pm

I need to increase my liquid cash position by about 15-20k.
Should I reduce my retirement contributions, or simply liquidate a portion of my taxable investments?
Which option would have less impact on my tax burden?

Details:

- I'm single, with no kids
- I live in Brooklyn, NY
- I own no real estate
- I make 78k/yr.
- I max out my 401(k) and 457(b) every year. This makes my taxable income about 31k/yr. (15% tax bracket)
- I also max out my Roth IRA
- My taxable investments are VASGX (Vanguard LifeStrategy Growth Fund Investor Shares), VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) and VTIAX (Vanguard Total International Stock Index Fund Admiral Shares)

If I opt to liquidate, which fund(s) should I withdraw from, and should I withdraw in one lump sum, or more gradually? Does it make a difference?

Thanks
Last edited by joer1212 on Thu Oct 12, 2017 11:25 pm, edited 6 times in total.

livesoft
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by livesoft » Wed Oct 11, 2017 6:19 pm

What is your marginal income tax bracket? Or what is your taxable income shown on Form 1040 Line 43? I assume you are itemizing deductions and filing single.

What is the amount of your LifeStrategy fund in dollars and what are the unrealized capital gains? Are they long-term? Have you set the cost basis method to Specific Identification?

Depending on the answers to the above, you may liquidate all at once or some in 2016 and some in January 2017.

Also don't forget that return-of-capital is tax-free.
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joer1212
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Wed Oct 11, 2017 6:52 pm

livesoft wrote:
Wed Oct 11, 2017 6:19 pm
What is your marginal income tax bracket? Or what is your taxable income shown on Form 1040 Line 43? I assume you are itemizing deductions and filing single.

What is the amount of your LifeStrategy fund in dollars and what are the unrealized capital gains? Are they long-term? Have you set the cost basis method to Specific Identification?

Depending on the answers to the above, you may liquidate all at once or some in 2016 and some in January 2017.
Line 43 on form 1040 states that my taxable income is $30,978.
My marginal tax bracket is 25%
My LifeStrategy fund has only about 6k, but my other 2 accounts have almost 200k. Not sure what my unrealized capital gains are, but they are long-term (more than 1 year).
Forgive my ignorance, but what is setting the cost basis to "Specific Identification", and how do you do this on Vanguard's website?

livesoft
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by livesoft » Wed Oct 11, 2017 7:08 pm

joer1212 wrote:
Wed Oct 11, 2017 6:52 pm

Line 43 on form 1040 states that my taxable income is $30,978.
My marginal tax bracket is 25%
My LifeStrategy fund has only about 6k, but my other 2 accounts have almost 200k. Not sure what my unrealized capital gains are, but they are long-term (more than 1 year).
Forgive my ignorance, but what is setting the cost basis to "Specific Identification", and how do you do this on Vanguard's website?
The IRS tells me that taxable income for filing single of 30,978 is well below the top of the 15% marginal income tax bracket, so how did you figure 25%? :?

Spec ID cost basis setting, see: viewtopic.php?t=179414

You have confused me because earlier you suggested you could sell $15K to $20K of LIfeStrategy Growth, but now you say you can only sell $6K. Now I see your edits. You can sell $15K to $20K of any long-term "lots" that have a total of about $7K of unrealized capital gains in order to realize about $7K of long-term capital gains and not pay any additional taxes. That is, the $15K to $20K would be tax-free to you - provided the information you gave me was accurate for 2017.

Also it would be even more tax-efficient if you sold "lots" that had losses and not lots with gains.

You should NOT reduce your retirement plan contributions. But did your 2016 tax return include dividends from your mutual funds or are those new for 2017?
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TravelforFun
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by TravelforFun » Wed Oct 11, 2017 7:26 pm

Not answering your questions but I have a question for you. Why are you maxing out 401K and 457b and not putting money in a Roth?

I would contribute to the 401K or 457b up to the match, then put money in the $5,500 a year ROTH bucket, then save any left over money in a saving account to build up my 15K cash position.

joer1212
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Wed Oct 11, 2017 7:37 pm

livesoft wrote:
Wed Oct 11, 2017 7:08 pm
joer1212 wrote:
Wed Oct 11, 2017 6:52 pm

Line 43 on form 1040 states that my taxable income is $30,978.
My marginal tax bracket is 25%
My LifeStrategy fund has only about 6k, but my other 2 accounts have almost 200k. Not sure what my unrealized capital gains are, but they are long-term (more than 1 year).
Forgive my ignorance, but what is setting the cost basis to "Specific Identification", and how do you do this on Vanguard's website?
The IRS tells me that taxable income for filing single of 30,978 is well below the top of the 15% marginal income tax bracket, so how did you figure 25%? :?

Spec ID cost basis setting, see: viewtopic.php?t=179414

You have confused me because earlier you suggested you could sell $15K to $20K of LIfeStrategy Growth, but now you say you can only sell $6K. Now I see your edits. You can sell $15K to $20K of any long-term "lots" that have a total of about $7K of unrealized capital gains in order to realize about $7K of long-term capital gains and not pay any additional taxes. That is, the $15K to $20K would be tax-free to you - provided the information you gave me was accurate for 2017.

Also it would be even more tax-efficient if you sold "lots" that had losses and not lots with gains.

You should NOT reduce your retirement plan contributions. But did your 2016 tax return include dividends from your mutual funds or are those new for 2017?
Sorry for the mistake. Yes, 15% marginal rate.

Yes, my 2016 tax return includes dividends (line 9a: $3,383 "Ordinary" dividends; line 9b: $2,857 "Qualified" dividends).
Total income was $41,328 (of which $30,978 was taxable).

How about NYS/NYC taxes? How will these withdrawals affect them?
Also, am I too late to tax loss harvest? Do these "lots" that you refer to have anything to do with that?

My knowledge of investing far exceeds my knowledge of taxes, so please excuse my ignorance on the subject.

I will check out the link you provided and get back to you with any questions, should I have any. Thank you much.

livesoft
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by livesoft » Wed Oct 11, 2017 7:43 pm

It is unlikely that you have lots that have losses since the stock market is pretty much at all-time highs, but if you have lots with losses, then you are not too late to tax-loss harvest for 2017.

Yes, selling to realize gains will affect your NYS/NYC taxes.
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joer1212
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Wed Oct 11, 2017 7:44 pm

TravelforFun wrote:
Wed Oct 11, 2017 7:26 pm
Not answering your questions but I have a question for you. Why are you maxing out 401K and 457b and not putting money in a Roth?

I would contribute to the 401K or 457b up to the match, then put money in the $5,500 a year ROTH bucket, then save any left over money in a saving account to build up my 15K cash position.
I'm sorry, but I neglected to mention that I am also maxing out my Roth IRA every year. So, I am maxing out all 3 accounts.
The reason I have so much in taxable is because, when I got into investing in 2009, I put my cash in corporate bonds (instead of my retirement accounts, which I should have been investing in-- BIG mistake).
Then, in 2012, I sold my bonds and put everything in a lump sum in the taxable accounts I have now.

joer1212
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Wed Oct 11, 2017 7:49 pm

livesoft wrote:
Wed Oct 11, 2017 7:43 pm
It is unlikely that you have lots that have losses since the stock market is pretty much at all-time highs, but if you have lots with losses, then you are not too late to tax-loss harvest for 2017.

Yes, selling to realize gains will affect your NYS/NYC taxes.
Sorry, I meant if I was too late to tax loss harvest for years prior to 2017.
Also, I need to find out how much selling my investments will impact my state and local taxes.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Thu Oct 12, 2017 10:31 am

livesoft wrote:
Wed Oct 11, 2017 7:08 pm
You can sell $15K to $20K of any long-term "lots" that have a total of about $7K of unrealized capital gains in order to realize about $7K of long-term capital gains and not pay any additional taxes. That is, the $15K to $20K would be tax-free to you
I read your detailed post about "specific identification cost basis". Very thorough and informative. I've often wondered how I would go about calculating the cost basis/taxes for my numerous Vanguard purchases. The prospect of figuring it all out manually was daunting. But, after reading your thread, I'm relieved to find out that it's fairly simple.

I have one question.
How did you determine that I can cash out about 7k of unrealized long-term capital gains tax-free (from the sale of 15-20k)?
Is there a table/formula you're basing this calculation on?
Last edited by joer1212 on Thu Oct 12, 2017 10:40 am, edited 1 time in total.

Grt2bOutdoors
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by Grt2bOutdoors » Thu Oct 12, 2017 10:38 am

joer1212 wrote:
Thu Oct 12, 2017 10:31 am
livesoft wrote:
Wed Oct 11, 2017 7:08 pm
You can sell $15K to $20K of any long-term "lots" that have a total of about $7K of unrealized capital gains in order to realize about $7K of long-term capital gains and not pay any additional taxes. That is, the $15K to $20K would be tax-free to you
I read your detailed post about "specific identification cost basis". Very thorough and informative. I've often wondered how I would go about calculating my cost basis/taxes for my numerous Vanguard purchases. The prospect of figuring it all out manually was daunting. But, after reading your thread, I'm relieved to find out that it's fairly simple.

I have one question.
How did you determine that I can cash out about 7k of unrealized long-term capital gains tax-free (from the sale of 15-20k)?
Is there a table/formula you're basing this calculation on?
Google is your friend. Search for IRS.gov and marginal tax rates or brackets. The IRS website will show you what level of taxable income corresponds to each marginal tax rate for singles. The 7K is likely the top amount of capital gains you can take before you would be bumped into a higher marginal tax bracket and cause you to incur taxes on the sale of your shares.
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joer1212
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Thu Oct 12, 2017 10:50 am

Grt2bOutdoors wrote:
Thu Oct 12, 2017 10:38 am
joer1212 wrote:
Thu Oct 12, 2017 10:31 am
livesoft wrote:
Wed Oct 11, 2017 7:08 pm
You can sell $15K to $20K of any long-term "lots" that have a total of about $7K of unrealized capital gains in order to realize about $7K of long-term capital gains and not pay any additional taxes. That is, the $15K to $20K would be tax-free to you
I read your detailed post about "specific identification cost basis". Very thorough and informative. I've often wondered how I would go about calculating my cost basis/taxes for my numerous Vanguard purchases. The prospect of figuring it all out manually was daunting. But, after reading your thread, I'm relieved to find out that it's fairly simple.

I have one question.
How did you determine that I can cash out about 7k of unrealized long-term capital gains tax-free (from the sale of 15-20k)?
Is there a table/formula you're basing this calculation on?
Google is your friend. Search for IRS.gov and marginal tax rates or brackets. The IRS website will show you what level of taxable income corresponds to each marginal tax rate for singles. The 7K is likely the top amount of capital gains you can take before you would be bumped into a higher marginal tax bracket and cause you to incur taxes on the sale of your shares.
I'm a bit confused. How would an additional 7k of income (on top of my taxable wages of $30,978) be tax-free?
Is there a special tax exemption for capital gains up to a certain amount every year based on income?

I did check out the marginal tax rates prior to posting my question, but there doesn't appear to be any info on capital gains specifically:

https://taxfoundation.org/2017-tax-brackets/
Last edited by joer1212 on Thu Oct 12, 2017 11:19 am, edited 1 time in total.

Grt2bOutdoors
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by Grt2bOutdoors » Thu Oct 12, 2017 11:12 am

How did you go to that other website?, I indicated IRS.Gov as the source.
Alternatively, you can use Turbotax Caster online, input your specific information and anticipated securities sales and cost basis, it will calculate the tax for you. Adding ten additional dollars of capital gain, will cause your taxes to increase by what percentage? That is how you determine what your marginal tax rate is. But, you have to do it, we can not.
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joer1212
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Thu Oct 12, 2017 11:19 am

Grt2bOutdoors wrote:
Thu Oct 12, 2017 11:12 am
How did you go to that other website?, I indicated IRS.Gov as the source.
Alternatively, you can use Turbotax Caster online, input your specific information and anticipated securities sales and cost basis, it will calculate the tax for you. Adding ten additional dollars of capital gain, will cause your taxes to increase by what percentage? That is how you determine what your marginal tax rate is. But, you have to do it, we can not.
I'll check it out.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by Grt2bOutdoors » Thu Oct 12, 2017 11:21 am

joer1212 wrote:
Thu Oct 12, 2017 10:50 am
Grt2bOutdoors wrote:
Thu Oct 12, 2017 10:38 am
joer1212 wrote:
Thu Oct 12, 2017 10:31 am
livesoft wrote:
Wed Oct 11, 2017 7:08 pm
You can sell $15K to $20K of any long-term "lots" that have a total of about $7K of unrealized capital gains in order to realize about $7K of long-term capital gains and not pay any additional taxes. That is, the $15K to $20K would be tax-free to you
I read your detailed post about "specific identification cost basis". Very thorough and informative. I've often wondered how I would go about calculating my cost basis/taxes for my numerous Vanguard purchases. The prospect of figuring it all out manually was daunting. But, after reading your thread, I'm relieved to find out that it's fairly simple.

I have one question.
How did you determine that I can cash out about 7k of unrealized long-term capital gains tax-free (from the sale of 15-20k)?
Is there a table/formula you're basing this calculation on?
Google is your friend. Search for IRS.gov and marginal tax rates or brackets. The IRS website will show you what level of taxable income corresponds to each marginal tax rate for singles. The 7K is likely the top amount of capital gains you can take before you would be bumped into a higher marginal tax bracket and cause you to incur taxes on the sale of your shares.
I'm a bit confused. How would an additional 7k of income (on top of my wages of $30,978) be tax-free?
Is there a special tax exemption for capital gains up to a certain amount every year based on income?

I did check out the marginal tax rates prior to posting my question, but there doesn't appear to be any info on capital gains specifically:

https://taxfoundation.org/2017-tax-brackets/
Here's the math - you have taxable income (not wages) of 30,978 placing you squarely in the 15% marginal tax bracket.
Taxable income up to $37,950 keeps you in the 15% tax bracket. The first dollar of taxable income above that amount throws you in the 25% tax bracket. Long Term capital gains in the 10 and 15% tax brackets is tax-exempt. However, once you are in the 25% tax bracket, you are now subject to paying capital gains taxes. You asked about the most tax efficient method, and Livesoft provided you with the answer. The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by livesoft » Thu Oct 12, 2017 12:43 pm

Grt2bOutdoors gave information about tax brackets. The unanswered part might have been
"How did you know that selling $15K to $20K of something would realize only $7K of long-term capital gains?"

The answer is: I don't know. YOU have to figure out what to sell that would give you $15K to $20K of cash, yet have only $7K of long-term capital gains and $8K to $13K of return-of-capital (or cost basis).
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by grabiner » Thu Oct 12, 2017 6:20 pm

You could sell $11,000 from your taxable investments, and put $5500 in cash in a Roth IRA now, and $5500 in January 2018. This would increase your tax-deferred savings, and you could withdraw the $11,000 at any time tax-free. You would pay some tax now by doing this, but you would reduce your future taxes, particularly if you don't need the cash.

If you need more than $11,000, it's probably still better to sell taxable investments for a small gain, rather than permanently giving up tax-deferred space.
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joer1212
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Thu Oct 12, 2017 9:20 pm

Grt2bOutdoors wrote:
Thu Oct 12, 2017 11:21 am
joer1212 wrote:
Thu Oct 12, 2017 10:50 am
Grt2bOutdoors wrote:
Thu Oct 12, 2017 10:38 am
joer1212 wrote:
Thu Oct 12, 2017 10:31 am
livesoft wrote:
Wed Oct 11, 2017 7:08 pm
You can sell $15K to $20K of any long-term "lots" that have a total of about $7K of unrealized capital gains in order to realize about $7K of long-term capital gains and not pay any additional taxes. That is, the $15K to $20K would be tax-free to you
I read your detailed post about "specific identification cost basis". Very thorough and informative. I've often wondered how I would go about calculating my cost basis/taxes for my numerous Vanguard purchases. The prospect of figuring it all out manually was daunting. But, after reading your thread, I'm relieved to find out that it's fairly simple.

I have one question.
How did you determine that I can cash out about 7k of unrealized long-term capital gains tax-free (from the sale of 15-20k)?
Is there a table/formula you're basing this calculation on?
Google is your friend. Search for IRS.gov and marginal tax rates or brackets. The IRS website will show you what level of taxable income corresponds to each marginal tax rate for singles. The 7K is likely the top amount of capital gains you can take before you would be bumped into a higher marginal tax bracket and cause you to incur taxes on the sale of your shares.
I'm a bit confused. How would an additional 7k of income (on top of my wages of $30,978) be tax-free?
Is there a special tax exemption for capital gains up to a certain amount every year based on income?

I did check out the marginal tax rates prior to posting my question, but there doesn't appear to be any info on capital gains specifically:

https://taxfoundation.org/2017-tax-brackets/
Here's the math - you have taxable income (not wages) of 30,978 placing you squarely in the 15% marginal tax bracket.
Taxable income up to $37,950 keeps you in the 15% tax bracket. The first dollar of taxable income above that amount throws you in the 25% tax bracket. Long Term capital gains in the 10 and 15% tax brackets is tax-exempt. However, once you are in the 25% tax bracket, you are now subject to paying capital gains taxes. You asked about the most tax efficient method, and Livesoft provided you with the answer. The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.
This is the best explanation I've gotten so far.
I will withdraw about $6,972 in capital gains tax-free this year and about the same amount tax-free next year (assuming my income is about the same).
Last edited by joer1212 on Thu Oct 12, 2017 11:32 pm, edited 1 time in total.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Thu Oct 12, 2017 9:25 pm

grabiner wrote:
Thu Oct 12, 2017 6:20 pm
You could sell $11,000 from your taxable investments, and put $5500 in cash in a Roth IRA now, and $5500 in January 2018. This would increase your tax-deferred savings, and you could withdraw the $11,000 at any time tax-free. You would pay some tax now by doing this, but you would reduce your future taxes, particularly if you don't need the cash.

If you need more than $11,000, it's probably still better to sell taxable investments for a small gain, rather than permanently giving up tax-deferred space.
I already max out my Roth IRA every year from my paycheck. My goal here is to increase my cash and tax-advantaged holdings, while simultaneously reducing my taxable position.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by livesoft » Thu Oct 12, 2017 9:34 pm

joer1212 wrote:
Thu Oct 12, 2017 9:20 pm
This is the best explanation I've gotten so far.
I will withdraw about $6,972 tax-free this tax year and about the same amount tax-free next year (assuming my income is about the same).
I don't think you get it yet. What exactly do you mean by "withdraw about $6,972 tax-free this year" ??
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Thu Oct 12, 2017 11:11 pm

livesoft wrote:
Thu Oct 12, 2017 9:34 pm
joer1212 wrote:
Thu Oct 12, 2017 9:20 pm
This is the best explanation I've gotten so far.
I will withdraw about $6,972 tax-free this tax year and about the same amount tax-free next year (assuming my income is about the same).
I don't think you get it yet. What exactly do you mean by "withdraw about $6,972 tax-free this year" ??
Going by what Grt2Outdoors explained:

Long Term capital gains in the 10 and 15% tax brackets is tax-exempt. However, once you are in the 25% tax bracket, you are now subject to paying capital gains taxes. The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.


If this is incorrect, you need to take it up with him.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by livesoft » Fri Oct 13, 2017 4:55 am

So, let's take a smaller step: If you sell $15,000 of your VTIAX this year, how much of that $15,000 will appear on your tax return?
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by Kosmo » Fri Oct 13, 2017 8:45 am

livesoft is pointing you in the right direction.
Grt2bOutdoors wrote:
Thu Oct 12, 2017 11:21 am
The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.
This is the amount of capital gains that would be taxed at 0%. This is not the dollar amount of securities to sell.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by MotoTrojan » Fri Oct 13, 2017 8:57 am

These guys are getting you in the right direction, but to say it bluntly. There is a much greater than 0% chance that you can withdraw the full $20K you desire, and stay under $7K of capital-gains (pay no taxes).

Once you switch VG to specific id, you should be able to go to the cost-basis page and see the cost-basis of all of your taxable lots. Sell losses first, then lots with smallest gains (can also sell a partial lot). If the net of gains/losses adds up to under ~$7K, you pay no taxes; YAY.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by 22twain » Fri Oct 13, 2017 10:03 am

Grt2bOutdoors wrote:
Thu Oct 12, 2017 11:21 am
Here's the math - you have taxable income (not wages) of 30,978 placing you squarely in the 15% marginal tax bracket.
Taxable income up to $37,950 keeps you in the 15% tax bracket. The first dollar of taxable income above that amount throws you in the 25% tax bracket. Long Term capital gains in the 10 and 15% tax brackets is tax-exempt. However, once you are in the 25% tax bracket, you are now subject to paying capital gains taxes. You asked about the most tax efficient method, and Livesoft provided you with the answer. The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.
Just to clarify a bit further, in case anyone hasn't stated this explicitly yet: If you take that "one dollar more", it does not cause you to pay tax on all of the capital gains. You still pay $0 tax on the first $6,972. You pay 15% tax only on that "one dollar more", and on every dollar beyond that, until you (hypothetically) hit the point where the 20% long capital gains rate kicks in. So if you slip up in your calculations and go over the boundary a bit, it's not a disaster.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by Katietsu » Fri Oct 13, 2017 10:20 am

joer1212 wrote:
Thu Oct 12, 2017 11:11 pm
livesoft wrote:
Thu Oct 12, 2017 9:34 pm
joer1212 wrote:
Thu Oct 12, 2017 9:20 pm
This is the best explanation I've gotten so far.
I will withdraw about $6,972 tax-free this tax year and about the same amount tax-free next year (assuming my income is about the same).
I don't think you get it yet. What exactly do you mean by "withdraw about $6,972 tax-free this year" ??
Going by what Grt2Outdoors explained:

Long Term capital gains in the 10 and 15% tax brackets is tax-exempt. However, once you are in the 25% tax bracket, you are now subject to paying capital gains taxes. The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.


If this is incorrect, you need to take it up with him.
It is not incorrect as much as it is imprecise. Capital gains of mutual funds are not tax exempt but might be taxed at 0% for federal purposes. I believe you will pay state tax, don't know about NYC. Also, Livesoft is trying to see if you understand the difference between gross proceeds and capital gains.

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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Fri Oct 13, 2017 11:01 am

livesoft wrote:
Fri Oct 13, 2017 4:55 am
So, let's take a smaller step: If you sell $15,000 of your VTIAX this year, how much of that $15,000 will appear on your tax return?
Not sure of the exact numbers yet. I've struggled to find pertinent info on the labyrinthine IRS.gov. to confirm what I've been told here and do my own calculations. But, it may be moot at this point, as I'll probably sell VAGSX (~6k) this tax year and sell maybe another 10k sometime around the middle of 2018. Spreading my withdrawals to 2 years should place me well below the tax threshold. I don't need the cash right away, so I can afford to employ this strategy.

Grt2bOutdoors
Posts: 17138
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by Grt2bOutdoors » Fri Oct 13, 2017 11:04 am

Katietsu wrote:
Fri Oct 13, 2017 10:20 am
joer1212 wrote:
Thu Oct 12, 2017 11:11 pm
livesoft wrote:
Thu Oct 12, 2017 9:34 pm
joer1212 wrote:
Thu Oct 12, 2017 9:20 pm
This is the best explanation I've gotten so far.
I will withdraw about $6,972 tax-free this tax year and about the same amount tax-free next year (assuming my income is about the same).
I don't think you get it yet. What exactly do you mean by "withdraw about $6,972 tax-free this year" ??
Going by what Grt2Outdoors explained:

Long Term capital gains in the 10 and 15% tax brackets is tax-exempt. However, once you are in the 25% tax bracket, you are now subject to paying capital gains taxes. The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.


If this is incorrect, you need to take it up with him.
It is not incorrect as much as it is imprecise. Capital gains of mutual funds are not tax exempt but might be taxed at 0% for federal purposes. I believe you will pay state tax, don't know about NYC. Also, Livesoft is trying to see if you understand the difference between gross proceeds and capital gains.
Not exactly^^. You come late to the thread, but the OP already knows for purposes of this thread we are ONLY discussing federal tax implications, not state tax. He will most certainly pay NYS/NYC taxes on capital gains related to the sale of securities. You are correct, capital gains on mutual funds are not tax exempt, however at the 10% and 15% marginal tax brackets they are taxed at 0% for federal tax purposes only. Most folks would equate a 0% tax bracket as equivalent to tax-exempt (0% of $100 for example is zero).
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Location: New York

Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by Grt2bOutdoors » Fri Oct 13, 2017 11:06 am

joer1212 wrote:
Fri Oct 13, 2017 11:01 am
livesoft wrote:
Fri Oct 13, 2017 4:55 am
So, let's take a smaller step: If you sell $15,000 of your VTIAX this year, how much of that $15,000 will appear on your tax return?
Not sure of the exact numbers yet. I've struggled to find pertinent info on the labyrinthine IRS.gov. to confirm what I've been told here and do my own calculations. But, it may be moot at this point, as I'll probably sell VAGSX (~6k) this tax year and sell maybe another 10k sometime around the middle of 2018. Spreading my withdrawals to 2 years should place me well below the tax threshold. I don't need the cash right away, so I can afford to employ this strategy.
Let's use this example OP - you have $12,000 of VAGSX with a cost basis of $6,000 - your net gain is $6,000. Adding the $6,000 to your taxable income shown earlier keeps you in the 15% tax bracket. Your federal tax liability for capital gains only is $0 on Long Term Gains.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

joer1212
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Fri Oct 13, 2017 11:08 am

Kosmo wrote:
Fri Oct 13, 2017 8:45 am
livesoft is pointing you in the right direction.
Grt2bOutdoors wrote:
Thu Oct 12, 2017 11:21 am
The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.
This is the amount of capital gains that would be taxed at 0%. This is not the dollar amount of securities to sell.
Yes, I'm aware of that.

joer1212
Posts: 395
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Fri Oct 13, 2017 11:10 am

Grt2bOutdoors wrote:
Fri Oct 13, 2017 11:06 am
joer1212 wrote:
Fri Oct 13, 2017 11:01 am
livesoft wrote:
Fri Oct 13, 2017 4:55 am
So, let's take a smaller step: If you sell $15,000 of your VTIAX this year, how much of that $15,000 will appear on your tax return?
Not sure of the exact numbers yet. I've struggled to find pertinent info on the labyrinthine IRS.gov. to confirm what I've been told here and do my own calculations. But, it may be moot at this point, as I'll probably sell VAGSX (~6k) this tax year and sell maybe another 10k sometime around the middle of 2018. Spreading my withdrawals to 2 years should place me well below the tax threshold. I don't need the cash right away, so I can afford to employ this strategy.
Let's use this example OP - you have $12,000 of VAGSX with a cost basis of $6,000 - your net gain is $6,000. Adding the $6,000 to your taxable income shown earlier keeps you in the 15% tax bracket. Your federal tax liability for capital gains only is $0 on Long Term Gains.
Yes, exactly. But, I'll also have to calculate how this withdrawal will impact my state and local taxes.

thangngo
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by thangngo » Fri Oct 13, 2017 11:19 am

joer1212 wrote:
Wed Oct 11, 2017 6:17 pm
I need to increase my liquid cash position by about 15-20k.
Should I reduce my retirement contributions, or simply liquidate a portion of my taxable investments?
Which option would have less impact on my tax burden?

Details:

- I'm single, with no kids
- I live in Brooklyn, NY
- I own no real estate
- I make 78k/yr.
- I max out my 401(k) and 457(b) every year. This makes my taxable income about 31k/yr. (15% tax bracket)
- I also max out my Roth IRA
- My taxable investments are VASGX (Vanguard LifeStrategy Growth Fund Investor Shares), VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) and VTIAX (Vanguard Total International Stock Index Fund Admiral Shares)

If I opt to liquidate, which fund(s) should I withdraw from, and should I withdraw in one lump sum, or more gradually? Does it make a difference?

Thanks

Your salary should supply you with cash position. Unless you want 15-20k immediately, you should be able to save for the amount of money overtime. Your saving rate will determine how fast will you get there.

joer1212
Posts: 395
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Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by joer1212 » Fri Oct 13, 2017 11:44 am

thangngo wrote:
Fri Oct 13, 2017 11:19 am
joer1212 wrote:
Wed Oct 11, 2017 6:17 pm
I need to increase my liquid cash position by about 15-20k.
Should I reduce my retirement contributions, or simply liquidate a portion of my taxable investments?
Which option would have less impact on my tax burden?

Details:

- I'm single, with no kids
- I live in Brooklyn, NY
- I own no real estate
- I make 78k/yr.
- I max out my 401(k) and 457(b) every year. This makes my taxable income about 31k/yr. (15% tax bracket)
- I also max out my Roth IRA
- My taxable investments are VASGX (Vanguard LifeStrategy Growth Fund Investor Shares), VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) and VTIAX (Vanguard Total International Stock Index Fund Admiral Shares)

If I opt to liquidate, which fund(s) should I withdraw from, and should I withdraw in one lump sum, or more gradually? Does it make a difference?

Thanks

Your salary should supply you with cash position. Unless you want 15-20k immediately, you should be able to save for the amount of money overtime. Your saving rate will determine how fast will you get there.
I agree. I've been doing just that over the past 9 years. However, I recently made some investments outside of traditional stocks and bonds, which caused my cash reserves to run a bit low. I wasn't planning on doing this. But, I'll just consider these investments 'play money', as they comprise a small percentage of my overall portfolio.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by livesoft » Fri Oct 13, 2017 11:57 am

Based on the information in this thread, the joer1212 should consider Tax-gain Harvesting especially in late December.
https://www.bogleheads.org/wiki/Tax_gain_harvesting

Of course, one should understand the state and local tax implications before doing this, too.
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Katietsu
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Joined: Sun Sep 22, 2013 1:48 am

Re: Which is the Most Tax-Efficient Method to Increase Your Cash Position?

Post by Katietsu » Fri Oct 13, 2017 11:58 am

Grt2bOutdoors wrote:
Fri Oct 13, 2017 11:04 am
Katietsu wrote:
Fri Oct 13, 2017 10:20 am
joer1212 wrote:
Thu Oct 12, 2017 11:11 pm
livesoft wrote:
Thu Oct 12, 2017 9:34 pm
joer1212 wrote:
Thu Oct 12, 2017 9:20 pm
This is the best explanation I've gotten so far.
I will withdraw about $6,972 tax-free this tax year and about the same amount tax-free next year (assuming my income is about the same).
I don't think you get it yet. What exactly do you mean by "withdraw about $6,972 tax-free this year" ??
Going by what Grt2Outdoors explained:

Long Term capital gains in the 10 and 15% tax brackets is tax-exempt. However, once you are in the 25% tax bracket, you are now subject to paying capital gains taxes. The exact dollar amount of gains to take is $6,972, take one dollar more and now you will be paying more in taxes.


If this is incorrect, you need to take it up with him.
It is not incorrect as much as it is imprecise. Capital gains of mutual funds are not tax exempt but might be taxed at 0% for federal purposes. I believe you will pay state tax, don't know about NYC. Also, Livesoft is trying to see if you understand the difference between gross proceeds and capital gains.
Not exactly^^. You come late to the thread, but the OP already knows for purposes of this thread we are ONLY discussing federal tax implications, not state tax. He will most certainly pay NYS/NYC taxes on capital gains related to the sale of securities. You are correct, capital gains on mutual funds are not tax exempt, however at the 10% and 15% marginal tax brackets they are taxed at 0% for federal tax purposes only. Most folks would equate a 0% tax bracket as equivalent to tax-exempt (0% of $100 for example is zero).
The OP did ask about NY/NYC taxes.

The confusion I have seen with using "tax exempt" is that it sometimes leads people to not consider the capital gain when determining their taxable income and Marginal tax bracket. There are many threads here that are trying to explain why a person with a wage income of $30,000 can not avoid taxes on a $100,000 capital gain. I know that you understand the concept and that you gave enough details to avoid this assumption based on your answer. However, given the great deal of confusion at large on this point, I thought it best to clarify.

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