Cash in while LTCG rates are at historic lows?

Elle wrote:


Tad is correct that it is less than $65,100 (excluding LTCG and QDI).

Nitpick: It's less than $32,500 for singles.

The wash sale rule does not apply to securities sold for a gain.
-Will
william dot trice at ngc dot com
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Will Trice wrote:

Nitpick on my nitpick: That should be $32,550...
-Will
william dot trice at ngc dot com
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I am reading from http://www.irs.gov/pub/irs-drop/rp-07-66.pdf and stand by all that I wrote earlier except the wash sale comment. If you still disagree, send me a private email and you can set me straight (or I can do same for you) as needed on this particular nitpick.
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Elle wrote:

I hope someone gets to the bottom of this one, otherwise an unwary MIFP reader might overshoot by $1 and pay an extra 15 cents in capital gains taxes!
And just to clarify...it isn't really $65,100 (MFJ) excluding your qualified dividends and long-term capital gains - not for the question Rich was asking (whether we were advising sales to realize gains at current LTCG rates). You need to INCLUDE those, when checking to see how much room is left in the 15% bracket. Meaning, include any QDI or LTCG that are happening already (don't forget mutual fund distributions). Example - If you (MFJ) have $40,000 in taxable income, including $7,000 in QDI, you could only realize $65,100 - $40,000 = $25,100 in additional gains at the 0% rate. Your $7k in QDI gets the 0% rate too, but each extra dollar in capital gains, above $25,100, is taxed at 15%.
I'm pretty sure you know that but just wanted to clarify w/an example.
-Tad
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Elle wrote:

No need for the email, Tad presented an example similar to the one I would have sent.
-Will
william dot trice at ngc dot com
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Then we still disagree. But a lousy buck's difference is not enough to justify an exchange. It would only be "on principle," the principle being the translation of "not over $65,100" and like phrases.
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Elle wrote:

You're right, it's a real nit. But since you were nitpicking, we might as well get the nit right. The point is that if the income excluding LTCG and QDI (and other things like income from collectibles, etc.) in your taxable income is equal to $65,100 (MFJ) then there is no headroom left to use for dividends and LTCG to get the 0% rate. Hence the "less than".
-Will
william dot trice at ngc dot com
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TB wrote:

I guess I could have elaborated on that.
Yes, $65,100 is the top of the 15% tax bracket for married filing jointly in 2008, it's $32,550 for single filers, and this 0% capital gains rate has nothing to do with whether you're retired, it's for anyone whose other taxable income puts them in the 15%-or-below tax brackets. Which in 2005 was something like 70% of tax returns, so a lot of people should be able to make use of this in 2008-2010 -- assuming it isn't repealed along the way.
That's taxable income, meaning after deducting your exemptions and standard or itemized deductions. You could have higher adjusted gross income and still benefit from the 0% rate.
My hunch is that very few people will follow on "cost basis reset" sales, though...if one person in 10 has even heard of it I'd be surprised.
-Tad
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but we here are ahead of the curve. as any increase gets more chatter in Washington, more and more people will hear of this strategy. How many will act on it? who knows.
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TB wrote:

I wonder how many people are sufficiently below the top of the 15% bracket to make a difference, and actually have assets with capital gains that can be easily reset? I know that when I was single making less than $32k I wasn't investing in liquid assets (well, only if you include beer...).
-Will
william dot trice at ngc dot com
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Will Trice wrote:

Remember brackets are based on taxable income, not gross income, so you could make quite a bit more than the 32k/65k and still be in the 15% bracket. Think of deductions like $15k in mortgage interest, for home owners, or substantial deductible medical expenses, for some retirees. As much as 75% of the income-earning population might be able to do it.
And while there are those who simply have no investment assets, your typical mutual fund investor should have some way of making use of this. You just cherry-pick your investments that have gains - that international fund, for example. And if you haven't used "average cost basis" with a fund in the past (which is a good idea - never using it) you could make use of specific-identification sales to target your lowest-basis share lots. Think of what sales strategies you do to be "tax efficient" in a taxable account, and do the opposite.
-Tad
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Tad Borek wrote:

Good point, but I still wonder what percentage of those in the 15% or lower brackets have taxable capital gains that would benefit from this. And have sufficiently low income to make it useful. I would think that at these lower income levels most assets would be held tax-advantaged, but then maybe I'm grossly overestimating the incomes of current retirees and such.
-Will
william dot trice at ngc dot com
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Will Trice wrote:

Will, I agree. Many tax situations apply to some subset of taxpayers. The donating money straight from your IRA, for instance. I did this for one client and haven't heard of too many jumping on this. (it's not an option for 08).
In this case, I was using the rest of this same client's 25% bracket for the Roth conversion "top off". I need to look at the numbers to see if I should instead capture that same $$ as 0% cap gains.
JOE
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snip for brevity

I would not understate the importance of this tax advantage. As you may recall, you actually started trumpeting it back in April. (I remember the post and checked the date a few minutes ago.) The point should be reiterated here through 2008 as appropriate, AFAIC.
I had actually forgotten the tax break also applies to qualified dividends and stumbled on reiteration of this on the net in December, when I started some planning for 2008. It's going to make a large difference for me, and surely many retirees. (Lots? Don't know.) For one, I converted the last of my Trad IRA to Roth IRA* in early January partly because my taxes will be so low for 2008 as a result of the 0% tax break discussed here.
This is why I "elaborated" on the point. Get the word out and all. Get people to plan.
*After much study, I have decided all-Roth is most appropriate for my situation. But all-Roth is likely not best for everyone.
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Elle wrote:

Aren't you losing the benefit of the 'zero bracket'? STD deduction and exemption both go up each year. $8950 in 2008. The next $8025 is 10%. Unless you have enough post tax assets to keep generating income putting you above these levels, I'd think some regular IRA is of value if only to fill in the lower brackets each year. JOE
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That's true. My rationalization: (1) I weighed it against the likelihood of stocks going up a lot by 2009 and figured I'd roll the dice on their doing so get the Trad IRAs converted now, on the perceived "cheap." (2) It was not a lot of assets left in the Trad IRA. (3) Tax rates in 2009? I suppose the 0% rate is not a sure thing. (4) I like knowing in exactly five years, in a real pinch, I can get my money on every cent of original "contribution" (converted and not) to the Roth. These are in no particular order, and again, it is a bit of a rationalization so as to get it done with.
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That's not quite correct, depending on how far back your way-back machine can look. From 1913 to 1921, capital gains were taxed at ordinary rates, initially up to a maximum rate of 7 percent. In 1921 the Revenue Act of 1921 was introduced, allowing a tax rate of 12.5 percent gain for assets held at least two years. From 1934 to 1941, taxpayers could exclude percentages of gains that varied with the holding period: 20, 40, 60, and 70 percent of gains were excluded on assets held 1, 2, 5, and 10 years, respectively.
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