Capital Gains Tax When Very Little Income

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littlemore
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Capital Gains Tax When Very Little Income

Post by littlemore » Sun Apr 15, 2018 8:18 pm

Hello!

I have been taking this calendar year off from work to travel the world. I'm curious if I'm right about how the capital gains tax would work this year. Since I won't be making any income beyond my investment income this year will my marginal tax rate on these capital gains be $0 because I will be in one of the lower income brackets? Or am I not understanding this correctly.

Thanks!

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Peter Foley
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Re: Capital Gains Tax When Very Little Income

Post by Peter Foley » Sun Apr 15, 2018 8:52 pm

Yes you are understanding it correctly. There is a concept called tax gain harvesting, taking capital gains when one's income is low, to avoid potential long term capital gains when one's income is higher.

Gill
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Re: Capital Gains Tax When Very Little Income

Post by Gill » Sun Apr 15, 2018 8:57 pm

The amount of tax free capital gains is NOT unlimited.
Gill

CRC301
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Re: Capital Gains Tax When Very Little Income

Post by CRC301 » Sun Apr 15, 2018 9:01 pm

That's the way I understand it. I asked a similar question a while back just for informational purposes: viewtopic.php?f=10&t=217838.

Short term capital gains are taxed as ordinary income and would fall into the normal IRS income tax brackets. Long-term capital gains are taxed at the better long-term rates. Depending on how much LTCG you have you may end up paying $0 tax on it if your ordinary income + LTCG doesn't cross over into the 22% tax bracket income range. It's kind of confusing but once you're ordinary income + LTCG gain hits the income minimum for the 22% income tax bracket, the remaining LTCG is taxed at the next LTCG tax rate of 15%. There's one more LTCG rate after that of 20% but your ordinary income + LTCG must be well into 6-figures by that point ($400K+).

Others may chime in but there may be some other savvy things you could do in a low income year as well. Off the top of my head a Roth conversion would be a good idea if you had money sitting in a traditional IRA.

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Watty
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Re: Capital Gains Tax When Very Little Income

Post by Watty » Sun Apr 15, 2018 9:22 pm

Don't forget to also figure out the impact on your state taxes since they may tax capital gains much differently.

The long term capital gains may be taxed at zero percent but the income can also impact other things like getting a healthcare subsidy, or having such low income that you would be under medicare.

Another alternative to look at would be to see if doing Roth conversions in a low tax bracket might be a better use of the low tax year. There is not an obvious answer as to which is best since it depends on the details of your situation and it could be that a mixture of both Roth conversions and taking capital gains might make sense.

If you live in a high tax state then it might be possible to legally establish your tax residence in a low tax state while you travel. People that travel in RV's frequently do this. There can be a lot of details in how to do this right so you need to research it carefully.

JW-Retired
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Re: Capital Gains Tax When Very Little Income

Post by JW-Retired » Mon Apr 16, 2018 10:14 am

littlemore wrote:
Sun Apr 15, 2018 8:18 pm
Since I won't be making any income beyond my investment income this year will my marginal tax rate on these capital gains be $0 because I will be in one of the lower income brackets? Or am I not understanding this correctly.
How much cap gains get Federally taxed depends on how much all your income amounts to. Assuming you are single and all your investment income, including all the realized capital gains, grosses less than about $50.7k, (i.e., taxable income of $38.7k) If you are over that then the cap gains tax is 15%.

Which is it? It doesn't seem so totally obvious to me you can travel the world on all year on $50k. :?
JW
Retired at Last

seawolf21
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Re: Capital Gains Tax When Very Little Income

Post by seawolf21 » Mon Apr 16, 2018 11:06 am

Gill wrote:
Sun Apr 15, 2018 8:57 pm
The amount of tax free capital gains is NOT unlimited.
Gill
This is correct.

Refer to Qualified Dividends and Capital Gain Tax Worksheet in page 44 of 1040 instructions. Line 8 and 15 in this worksheet shows the taxable income tiers (varies by filing status) between capital gains rate of 0%, 15%, and 20%.

If you are single and have $500k in capital gains, part of it will be subject to the 20% rate.

mnnice
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Re: Capital Gains Tax When Very Little Income

Post by mnnice » Mon Apr 16, 2018 7:27 pm

Watty wrote:
Sun Apr 15, 2018 9:22 pm
Don't forget to also figure out the impact on your state taxes since they may tax capital gains much differently.

The long term capital gains may be taxed at zero percent but the income can also impact other things like getting a healthcare subsidy, or having such low income that you would be under medicare.

If you live in a high tax state then it might be possible to legally establish your tax residence in a low tax state while you travel. People that travel in RV's frequently do this. There can be a lot of details in how to do this right so you need to research it carefully.
It is fairly easy to have a negative federal tax liability and have a mid-four figure tax state liability. Ask me how I know :annoyed

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