TAXES on Tax Gain Harvesting ??

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Rajsx
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TAXES on Tax Gain Harvesting ??

Post by Rajsx »

We are 67 & 63 and retired, our income is only from our investments with no other income

We have significant amounts of Long Term Capital Gains sitting in VTI & VTI in our brokerage accounts,

I am looking into how the ramifications of Tax Gain Harvesting will play out in our year end taxes. ?

We get around $110 k in the dividends about 75% of which are qualified, we also do $150k of Roth Conversions from our IRAs.

I know that $80k of long term capital gains are taxed at 0 %

Do the $110k of Dividends count against the Tax free $80 k cap gains ? or do I get $80k of tax free capital gains ?

To recap our income is -

$150k Roth Conversion = Ordinary income
$110k Dividends , 75% are qualified

Q - If I do tax gain harvesting, how much of cap gains are taxed at 0% ??

Thanks for your help.
toddthebod
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Re: TAXES on Tax Gain Harvesting ??

Post by toddthebod »

Rajsx wrote: Mon May 13, 2024 9:34 pm We are 67 & 63 and retired, our income is only from our investments with no other income

We have significant amounts of Long Term Capital Gains sitting in VTI & VTI in our brokerage accounts,

I am looking into how the ramifications of Tax Gain Harvesting will play out in our year end taxes. ?

We get around $110 k in the dividends about 75% of which are qualified, we also do $150k of Roth Conversions from our IRAs.

I know that $80k of long term capital gains are taxed at 0 %

Do the $110k of Dividends count against the Tax free $80 k cap gains ? or do I get $80k of tax free capital gains ?

To recap our income is -

$150k Roth Conversion = Ordinary income
$110k Dividends , 75% are qualified

Q - If I do tax gain harvesting, how much of cap gains are taxed at 0% ??

Thanks for your help.
The $150k of Roth conversions and $27,500 of ordinary dividends will result in all of your capital gains being taxed at 15% (or more, depending on how much it is).
Last edited by toddthebod on Mon May 13, 2024 9:40 pm, edited 1 time in total.
steadyosmosis
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Re: TAXES on Tax Gain Harvesting ??

Post by steadyosmosis »

I use IRS Form 1040 to model my tax burden each year, then act accordingly (TGH, Roth-convert, etc.).
Age<59.5 | Early-retired | AA ~55/45 | Taxable=100% VTI | Roth IRA=97% equities | HSA=94% equities | Traditional IRA=100% fixed income | I spend from the taxable account |
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FiveK
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Re: TAXES on Tax Gain Harvesting ??

Post by FiveK »

Rajsx wrote: Mon May 13, 2024 9:34 pm Q - If I do tax gain harvesting, how much of cap gains are taxed at 0% ??
As mentioned already, none.

In fact, you'll likely incur IRMAA increases in two years if you incur much more than $10K in LTCG this year.

Roth Conversion with Social Security and Medicare IRMAA suggests a way you can check your own situation, if you are able to use Excel.
exodusNH
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Re: TAXES on Tax Gain Harvesting ??

Post by exodusNH »

Rajsx wrote: Mon May 13, 2024 9:34 pm We are 67 & 63 and retired, our income is only from our investments with no other income

We have significant amounts of Long Term Capital Gains sitting in VTI & VTI in our brokerage accounts,

I am looking into how the ramifications of Tax Gain Harvesting will play out in our year end taxes. ?

We get around $110 k in the dividends about 75% of which are qualified, we also do $150k of Roth Conversions from our IRAs.

I know that $80k of long term capital gains are taxed at 0 %

Do the $110k of Dividends count against the Tax free $80 k cap gains ? or do I get $80k of tax free capital gains ?

To recap our income is -

$150k Roth Conversion = Ordinary income
$110k Dividends , 75% are qualified

Q - If I do tax gain harvesting, how much of cap gains are taxed at 0% ??

Thanks for your help.
It doesn't work like that. This article describes it well: https://www.kitces.com/blog/long-term-c ... in-0-rate/
SnowBog
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Re: TAXES on Tax Gain Harvesting ??

Post by SnowBog »

I find this a useful visualization to understand how various income lands in various tax brackets.

https://engaging-data.com/tax-brackets/ ... 00&yr=2024

Regular wage income would include your Roth conversions and any unqualified dividends (as well as any interest - which you didn't state).

Capital gain income would include your qualified dividends.

If you decide to tax gain harvest, assuming they are all "long-term" gains, you can add the amount of gains to the "capital gain" input.

As a reminder, this does not calculate things like NIIT, IRMAA, properly handle the unique taxation of social security, nor state taxes. So it's "directionally correct" for federal tax rates - but not complete or accurate for all situations.
Last edited by SnowBog on Tue May 14, 2024 11:25 am, edited 2 times in total.
Topic Author
Rajsx
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Re: TAXES on Tax Gain Harvesting ??

Post by Rajsx »

Thankyou,

I understand better now
cas
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Re: TAXES on Tax Gain Harvesting ??

Post by cas »

Rajsx wrote: Mon May 13, 2024 9:34 pm To recap our income is -

$150k Roth Conversion = Ordinary income
$110k Dividends , 75% are qualified

Q - If I do tax gain harvesting, how much of cap gains are taxed at 0% ??
As toddthebodd and FiveK said above: none.

In addition to factors that they mentioned, you would also owe an additional 3.8% Net Investment Income Tax (NIIT) on any additional capital gains. (You show $260K AGI currently, and NIIT kicks in at $250K AGI (Married Filing Jointly).

So that is a minimum of an 18.8% (15% + 3.8%) marginal rate on any additional long term capital gains. (And that is before IRMAA is considered.)


Also ... apologies for bringing up something you didn't ask, but it is a related topic: Are you aware that the majority of your $150K Roth conversion is being taxed at (federal) marginal rates of 25% and above?

(The $82.5K in qualified dividends means that most of your 10% and 12% nominal brackets for ordinary income have been overlaid with a 25% and 27% marginal rate "bump zone". (This is the same article that exodusNH linked above. If the initial wall of text causes your eyes to glaze over, this is a common reaction. Make sure to scroll down to the examples/graphics.))

I'm concerned that you may think that a lot of that $150K Roth conversion is being taxed at 12% or under, when, in reality, most of it is being taxed at 25% and above.

If you can use Excel, I highly recommend using the tutorial that FiveK linked above to create your own personalized marginal rate graph.
Topic Author
Rajsx
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Re: TAXES on Tax Gain Harvesting ??

Post by Rajsx »

Thanks again,

We have been in 24% marginal tax bracket for several yrs now & in 2023 Effective tax rate was 13.6%.

Yes IRMAA & NIIT has been with us for several years. 😡
Last edited by Rajsx on Tue May 14, 2024 11:12 am, edited 1 time in total.
the_wiki
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Re: TAXES on Tax Gain Harvesting ??

Post by the_wiki »

Rajsx wrote: Mon May 13, 2024 9:34 pm

I know that $80k of long term capital gains are taxed at 0 %
You would only be charged the 0% rate on LTCG if your total taxable income, including the gains, are below the threshold. For 2024 it appears to be about $94k for MFJ.

Given you have $110k just in dividend income, I don't think you will ever have much 0% space.

And if you don't expect to be in a lower than 22% bracket in the future, not sure Roth conversion makes sense either.
suemarkp
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Re: TAXES on Tax Gain Harvesting ??

Post by suemarkp »

You mention tax gain harvesting, but also dividends. If you have $110K in dividends and 75% of that are qualified dividends, you don't have much room left. The non-qualified dividends can eat up your standard deduction with a little bit left over. After that, the qualified dividends would be 0%. You have some room still, but not much, to sell some shares and tax gain harvest. There is still a bit of headroom in the standard deduction window too. But this leaves no room for Roth conversions or IRA withdrawals if you tax gain harvest at 0% or even 15%. I think you could be paying no taxes if you weren't doing Roth conversions. So all the tax you are paying is the cost of your conversions, plus the higher medicare cost.

Suggest you play with a tax calculator and decide what works best for you -- a small Roth conversion, some tax gain harvesting, or something else such as selling long term shares and moving them to something that doesn't produce dividends (and VTI is already pretty low compared to some other choices so you must have a lot of VTI). The future will be harder to model, as once you start having RMDs from your IRA, that is going to push all the Capital gains to the right and taxes will go up a lot. Not sure it makes sense to force that now with Roth Conversions.

Will you ever be getting Social Security? That is another one with complicated taxation.
Mark | Somewhere in WA State
Topic Author
Rajsx
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Re: TAXES on Tax Gain Harvesting ??

Post by Rajsx »

I appreciate the replies from all of you, I understand very clearly that I do not & will not ever qualify for 0% Long Term Cap Gains Tax.

Now, the thread is moving to other areas of our savings.

We are at a stage of life, a first world problem & I guess a good problem to have. We never thought we would amass a high 7 digit portfolio, as we have had humble beginnings with regular savings in the brokerage after maximizing the pre tax retirement.

Our Asset Allocation now is 60 % VTI / 19% VXUS / 11% BND / 11% CDs

The higher equity % is for investing for the Kids & grand kids as we cannot possibly spend the savings in our life times.

Our taxes have regularly been in $40 thousands after serial yearly Roth conversions, with pretax money of $ 1 million odd still left. We would rather not leave IRAs for kids to worry about, they would rather get the step up from our all stock brokerages & all stock Roths of $1.3 m.

I do not know the exact calculations whether if Roth Conversions make sense to us, but leaving the IRAs for the kids does not make sense. Yes we do charity from our present DAF & we will continue that from IRA at age 70.5.

So those are some of the reasons we continue to do Roth Conversions & pay lots of Taxes .
placeholder
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Re: TAXES on Tax Gain Harvesting ??

Post by placeholder »

The capital gains and qualified dividends floating on top of income is what leads to the so called bump bracket where even though at 12% ordinary income tax rate the 0% space is full and every new dollar of ordinary income bumps out a dollar of dividends or ltcgs for a net rate of 27%.
eukonomos
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Re: TAXES on Tax Gain Harvesting ??

Post by eukonomos »

Rajsx wrote: Tue May 14, 2024 1:38 pm ...

Our taxes have regularly been in $40 thousands after serial yearly Roth conversions, with pretax money of $ 1 million odd still left. We would rather not leave IRAs for kids to worry about, they would rather get the step up from our all stock brokerages & all stock Roths of $1.3 m.

I do not know the exact calculations whether if Roth Conversions make sense to us, but leaving the IRAs for the kids does not make sense. Yes we do charity from our present DAF & we will continue that from IRA at age 70.5.

So those are some of the reasons we continue to do Roth Conversions & pay lots of Taxes .
Something to consider (if you haven't already):
If down the road, one or both of you need expensive long-term care, having several 100K's in pretax IRAs might be nice to spend on deductible medical expenses. Most of that money is then never taxed.
And if you do not use it all, that much money inherited by 2 or more kids, distributed over 10 years, may not create a big tax hit for them.
bogles the mind
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Re: TAXES on Tax Gain Harvesting ??

Post by bogles the mind »

Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
the_wiki
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Re: TAXES on Tax Gain Harvesting ??

Post by the_wiki »

bogles the mind wrote: Thu May 16, 2024 10:01 am Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
It makes sense to me. The 0% LTCG bracket is to give lower income people a tax break to encourage long term saving. Many lower income people have a harder time investing at all. If you didn't include regular income, you would have people making $500k a year snagging tax free income on top every year. And people in that bracket don't have trouble investing and building wealth without tax breaks.

Honestly if you want it to be simple, income should just be income and all goes in the same tax bucket. The lower incomes pay lower taxes, just like with earned income. But I am sure that would ruffle some feathers. :D
avalpert1
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Re: TAXES on Tax Gain Harvesting ??

Post by avalpert1 »

bogles the mind wrote: Thu May 16, 2024 10:01 am Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
Taxing capital gains at a different rate than 'regular' income increases the complexity of the tax code (whether more than it needs to be or not is a policy discussion that is off topic). But once you choose to do that, determining the order of income is necessary and not introducing unneeded complexity - it also isn't particularly complex, regular income comes first and capital gains come on top is fairly straightforward.
bogles the mind
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Re: TAXES on Tax Gain Harvesting ??

Post by bogles the mind »

the_wiki wrote: Thu May 16, 2024 10:29 am
bogles the mind wrote: Thu May 16, 2024 10:01 am Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
It makes sense to me. The 0% LTCG bracket is to give lower income people a tax break to encourage long term saving. Many lower income people have a harder time investing at all. If you didn't include regular income, you would have people making $500k a year snagging tax free income on top every year. And people in that bracket don't have trouble investing and building wealth without tax breaks.

Honestly if you want it to be simple, income should just be income and all goes in the same tax bucket. The lower incomes pay lower taxes, just like with earned income. But I am sure that would ruffle some feathers. :D
How would people making $500,000 pay nothing?
bogles the mind
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Re: TAXES on Tax Gain Harvesting ??

Post by bogles the mind »

Double post
bogles the mind
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Re: TAXES on Tax Gain Harvesting ??

Post by bogles the mind »

avalpert1 wrote: Thu May 16, 2024 10:35 am
bogles the mind wrote: Thu May 16, 2024 10:01 am Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
Taxing capital gains at a different rate than 'regular' income increases the complexity of the tax code (whether more than it needs to be or not is a policy discussion that is off topic). But once you choose to do that, determining the order of income is necessary and not introducing unneeded complexity - it also isn't particularly complex, regular income comes first and capital gains come on top is fairly straightforward.
The part I didn't realize was the stacking when determining the tax free deduction. I thought it was up to ~$80,000 for a joint account not counting the ordinary income.In other words I thought it was a totally separate calculation.
avalpert1
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Re: TAXES on Tax Gain Harvesting ??

Post by avalpert1 »

bogles the mind wrote: Thu May 16, 2024 10:57 am
avalpert1 wrote: Thu May 16, 2024 10:35 am
bogles the mind wrote: Thu May 16, 2024 10:01 am Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
Taxing capital gains at a different rate than 'regular' income increases the complexity of the tax code (whether more than it needs to be or not is a policy discussion that is off topic). But once you choose to do that, determining the order of income is necessary and not introducing unneeded complexity - it also isn't particularly complex, regular income comes first and capital gains come on top is fairly straightforward.
The part I didn't realize was the stacking when determining the tax free deduction. I thought it was up to ~$80,000 for a joint account not counting the ordinary income.In other words I thought it was a totally separate calculation.
I have to say, it bogles my mind that someone would think a couple earning a half million dollar salary (who has at least the same standard deduction as everyone else) would also get $80k in tax-free capital gains.
the_wiki
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Re: TAXES on Tax Gain Harvesting ??

Post by the_wiki »

bogles the mind wrote: Thu May 16, 2024 10:51 am
the_wiki wrote: Thu May 16, 2024 10:29 am
bogles the mind wrote: Thu May 16, 2024 10:01 am Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
It makes sense to me. The 0% LTCG bracket is to give lower income people a tax break to encourage long term saving. Many lower income people have a harder time investing at all. If you didn't include regular income, you would have people making $500k a year snagging tax free income on top every year. And people in that bracket don't have trouble investing and building wealth without tax breaks.

Honestly if you want it to be simple, income should just be income and all goes in the same tax bucket. The lower incomes pay lower taxes, just like with earned income. But I am sure that would ruffle some feathers. :D
How would people making $500,000 pay nothing?
Say I am a married surgeon making $500k a year. I have some significant investments with capital gains. I see that the 0% LTCG bracket goes up to $89,250 for 2024. If my income from my job was not part of the capital gains bracket, I as a top 1% earner, could cash out $89250 of my gains at 0% tax. I could then reinvest it immediately at a higher price making my future taxes lower. I would repeat this every single year. giving me a massive tax advantage. That is why it does NOT work that way and why total income has to be factored in.
bogles the mind
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Re: TAXES on Tax Gain Harvesting ??

Post by bogles the mind »

the_wiki wrote: Thu May 16, 2024 12:46 pm
bogles the mind wrote: Thu May 16, 2024 10:51 am
the_wiki wrote: Thu May 16, 2024 10:29 am
bogles the mind wrote: Thu May 16, 2024 10:01 am Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
It makes sense to me. The 0% LTCG bracket is to give lower income people a tax break to encourage long term saving. Many lower income people have a harder time investing at all. If you didn't include regular income, you would have people making $500k a year snagging tax free income on top every year. And people in that bracket don't have trouble investing and building wealth without tax breaks.

Honestly if you want it to be simple, income should just be income and all goes in the same tax bucket. The lower incomes pay lower taxes, just like with earned income. But I am sure that would ruffle some feathers. :D
How would people making $500,000 pay nothing?
Say I am a married surgeon making $500k a year. I have some significant investments with capital gains. I see that the 0% LTCG bracket goes up to $89,250 for 2024. If my income from my job was not part of the capital gains bracket, I as a top 1% earner, could cash out $89250 of my gains at 0% tax. I could then reinvest it immediately at a higher price making my future taxes lower. I would repeat this every single year. giving me a massive tax advantage. That is why it does NOT work that way and why total income has to be factored in.
Wouldn't his $500K income still be taxed as ordinary income? My point is why not keep the 2 calculations separate? Lower the the 0% bracket limit if need be.
avalpert1
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Re: TAXES on Tax Gain Harvesting ??

Post by avalpert1 »

bogles the mind wrote: Thu May 16, 2024 2:15 pm
the_wiki wrote: Thu May 16, 2024 12:46 pm
bogles the mind wrote: Thu May 16, 2024 10:51 am
the_wiki wrote: Thu May 16, 2024 10:29 am
bogles the mind wrote: Thu May 16, 2024 10:01 am Stacking capital gains and ordinary income is just an example of making the tax code more complicated than it needs to be. Thanks for the link above to guide me through it. I never fully understood it.
It makes sense to me. The 0% LTCG bracket is to give lower income people a tax break to encourage long term saving. Many lower income people have a harder time investing at all. If you didn't include regular income, you would have people making $500k a year snagging tax free income on top every year. And people in that bracket don't have trouble investing and building wealth without tax breaks.

Honestly if you want it to be simple, income should just be income and all goes in the same tax bucket. The lower incomes pay lower taxes, just like with earned income. But I am sure that would ruffle some feathers. :D
How would people making $500,000 pay nothing?
Say I am a married surgeon making $500k a year. I have some significant investments with capital gains. I see that the 0% LTCG bracket goes up to $89,250 for 2024. If my income from my job was not part of the capital gains bracket, I as a top 1% earner, could cash out $89250 of my gains at 0% tax. I could then reinvest it immediately at a higher price making my future taxes lower. I would repeat this every single year. giving me a massive tax advantage. That is why it does NOT work that way and why total income has to be factored in.
Wouldn't his $500K income still be taxed as ordinary income? My point is why not keep the 2 calculations separate? Lower the the 0% bracket limit if need be.
Because our government, in trying to determine how to balance tax revenues to fund government activity, doesn't believe that people who have over $500k in regular income should also be afforded an additional $80k in tax free capital gains...
bogles the mind
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Re: TAXES on Tax Gain Harvesting ??

Post by bogles the mind »

OK , fair enough.
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