Minimizing capital gains taxes

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Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Minimizing capital gains taxes

Post by robocop » Tue Sep 10, 2019 1:10 pm

Some of you may have seen my recent post about buying a house in the next three years. The consensus there was that I should pull the money we have saved for a down payment out of its current location (in Vanguard Target Retirement funds in a brokerage account) into something more stable, even if we wait a few years before buying.

To that end, I’m hoping to get your wise advice on how to minimize taxes when I do this.

Our gross income for this year will be around $270-280k. ($206k in W2 wages, and $65k guaranteed in self-employment income, with the possibility of about $10k more in self-employment income).

We always max 401k contributions, so that usually means $19k in contributions for the W2 earner, and usually $28-32k for the self-employed worker. We usually have a little bit of annual income from investments (I think this was $2k or less last year).

We don’t have many other deductions—the cost of running the business is pretty low, so a few deductions there, and one kid.

As of next year, our income will increase with a bonus and RSUs by about $50k and $20k, respectively. Note that these are tied to certain things that mean they can’t be taken away just willy nilly if the economy tanks, but they will be more or less generous somewhat (within limits) based on company and employee performance. The very conservative range estimate is probably $30-75k for the bonus, and the stock is usually pretty stable even in downturns.

Here is some more detail on the brokerage account:

$185k in Target 2035
$900 short term unrealized
$33.1k long term unrealized

$135k in Target 2045
$200 short term unrealized
$8.3k long term unrealized

My questions are:

1. Should I pull out all $200k this year, given our lower income? Seems like we’ll avoid the higher capital gains rate, but might run into the net investment tax. That said, it seems impossible to avoid that tax in future years without repeal, which seems unlikely.

2. If not, how would you do it?

3. Is there a way to sell so I only remove money subject to long term gains tax? If so, how do I do this at Vanguard?

4. What funds should I pull the money from? Whatever is left over will be used hopefully for retirement, but possibly in an emergency if needed.

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FiveK
Posts: 7363
Joined: Sun Mar 16, 2014 2:43 pm

Re: Minimizing capital gains taxes

Post by FiveK » Tue Sep 10, 2019 1:26 pm

robocop wrote:
Tue Sep 10, 2019 1:10 pm
My questions are:

1. Should I pull out all $200k this year, given our lower income? Seems like we’ll avoid the higher capital gains rate, but might run into the net investment tax. That said, it seems impossible to avoid that tax in future years without repeal, which seems unlikely.

2. If not, how would you do it?

3. Is there a way to sell so I only remove money subject to long term gains tax? If so, how do I do this at Vanguard?

4. What funds should I pull the money from? Whatever is left over will be used hopefully for retirement, but possibly in an emergency if needed.
3&4: You'll want to change the cost basis on all your holdings to "Specific ID." See Vanguard cost basis information: Know your options | Vanguard. Then, sell the lots in order of "least tax consequence first."

1&2: I'd create a spreadsheet with the lot information (from above) so I would know how much capital gain would be incurred as a function of the total amount sold and withdrawn/transferred.

Then I'd use something like the personal finance toolbox Excel spreadsheet to see where the marginal rate breakpoints are likely to occur in 2019 and 2020, and use that to guide my choice of how much to sell when.

Of course, that's how "I" would do it. ;) If spreadsheets aren't your friend, other tools are available. E.g., see US and state income tax calculator - Bogleheads.org.

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Minimizing capital gains taxes

Post by robocop » Wed Sep 18, 2019 3:39 pm

FiveK wrote:
Tue Sep 10, 2019 1:26 pm
robocop wrote:
Tue Sep 10, 2019 1:10 pm
My questions are:

1. Should I pull out all $200k this year, given our lower income? Seems like we’ll avoid the higher capital gains rate, but might run into the net investment tax. That said, it seems impossible to avoid that tax in future years without repeal, which seems unlikely.

2. If not, how would you do it?

3. Is there a way to sell so I only remove money subject to long term gains tax? If so, how do I do this at Vanguard?

4. What funds should I pull the money from? Whatever is left over will be used hopefully for retirement, but possibly in an emergency if needed.
3&4: You'll want to change the cost basis on all your holdings to "Specific ID." See Vanguard cost basis information: Know your options | Vanguard. Then, sell the lots in order of "least tax consequence first."

1&2: I'd create a spreadsheet with the lot information (from above) so I would know how much capital gain would be incurred as a function of the total amount sold and withdrawn/transferred.

Then I'd use something like the personal finance toolbox Excel spreadsheet to see where the marginal rate breakpoints are likely to occur in 2019 and 2020, and use that to guide my choice of how much to sell when.

Of course, that's how "I" would do it. ;) If spreadsheets aren't your friend, other tools are available. E.g., see US and state income tax calculator - Bogleheads.org.
Thank you! This was so helpful. That spreadsheet is amazing!

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