Looks like our income will be about $12k of qualified dividends. I want to take LTCGs and/or do Roth conversions. I have enough cash to live on, so all LTCGs or Roth Conversions will be reinvested.
As I understand, We (MFJ) get a ~$24k deduction, so can I do $78,750 + $12,000 = $90,750 in LTCGs at 0% tax? But, what If I do Roth Conversions? I see they are taxed as regular income, so I can convert the same $78,750 + $12,000 = $90,750, but I would owe 10% of $19,400 and 12% of $78,950 - $19,400 = $59,550 or $1,940 + $7,146 = $9,086. I'm told I will come out ahead in just a short time doing the Roth Conversions even though I paid the taxes. I haven't rationalized that but the spreadsheet gurus have convinced me, (for now). But, is there a combination of the two that would be better? Or can you give me more guidance on how to minimize taxes now and in the future with these two ideas. Retired this year. :-)
It looks like you understand how normal income tax rates and LTCG tax rates interact. I'll describe my understanding of the situation and show my math so others can correct whatever I have wrong.
For Married/Jointly the 2019 standard deduction is $24.4K, If total taxable income (including long term capital gains) is less than $78.75K the federal long term capital gains will be taxed at 0%. Non-capital gains income below $78.95K will be taxed at 10% for the first $19.4K and
12% after that. For tax calculation purposes, qualified dividends are treated like long term capital gains.
If a couple taking the standard deduction has $12K of qualified dividends (and no other income), they can have up to $91.15K ($78.75K + $24.4K - $12K) in LTCGs and the federal LTCGs (and the qualified dividends) will be taxed at 0%.
For your particular scenario I would definitely do the Roth conversion on $24.4K. This uses up the standard deduction (which is wasted if it is used for LTCG/QualDivs that would be taxed at 0%) and costs nothing in federal taxes. You now have $66.75K ($91.15K-$24.4K) that you can use for LTCGs taxed at 0% or Roth conversions taxed at 10%/12%.
Whether you should use the remaining $66.75K to realize tax free LTCGs or 10%/12% Roth conversions depends on information you didn't supply. Right now, the LTCG rate would be 0%. In the future would you expect your applicable rate to be 0%, 15%, 20% or 23.8%? Right now, the rate applied to Roth conversion income would be 10/12%. In the future would you expect the applicable rate to be 0%, 10%, 12%, 22%, 24%, higher? If you are affluent enough that you plan on donating substantial amounts to charity, you can donate appreciated securities to a charity and never pay capital gains tax on the donated securities (so avoiding LTCG now is of little value). After age 70.5 you can give up to $100K/year directly from your IRA to charity as a QCD (the donation effectively reduces your RMD requirement) and not pay taxes on the amount given to charity (so paying for a Roth conversion now is of little value). What are your expectations for the future?
Before accepting any conclusion from your "spreadsheet gurus", you should make sure you understand and agree with the assumptions that are built into the spreadsheet and the factors that are ignored. Spreadsheets can lead to poor decisions when the GIGO (Garbage in, Garbage out) principal is ignored.
Personally, the LTCG vs Roth conversion decision depends a lot on how bad I want to sell the appreciated asset. It is real hard for me to keep an appreciated asset I think should be sold if the LTCG rate is 0%.
You mentioned you just retired. If you are below age 65 and getting Obamacare premium tax credits, be aware that any income (from Roth conversions, LTCGs, Dividends, whatever) is included when calculating Obamacare premium tax credits. The Obamacare premium tax credit phaseout is equivalent to another substantial tax.
Much of that info is unknowable without an accurate crystal ball. If I assume 6% growth into the future (could be more or less) When I turn 70-1/2 between dividends, RMDs and S.S. I'll have a forced income of close to $80k, four years later when my wife turns 70-1/2 it will be over $100k, IF, I do nothing. The only thing I can reduce are the RMDs, by doing Roth Conversions. I don't have to sell the LTCGs.
QUESTION, How are the LTCGs taxed when transferred to our kids at our deaths.
Unknowable
A little more visibility there, fuzzy crystal ball says rates will be higher than 10/12% in the future. Two reasons, (1) I will have a much higher forced income, bumping me to a higher bracket, (assumes I do nothing, but even if I do Roth Conversions every year I will still have money left subject to RMDs). (2) Rates are low now, I doubt they will go lower, but I think they will be higher.
My Charity will be my children
No doubt, but I do have some faith this spreadsheet has been tested and corrected over and over by users and some tax accountants. Although still comes with caveats. I'll insert a link here, If this is not proper and the moderator removes it, my address is good, anyone can contact me for the link. Best to run with Excel. Be sure to only alter 'GREEN' highlighted Cells.
Most of my securities are in Vanguard Total Stock Market Index, VTSAX. I have a little more LTCGs than what I have put in.
Yes, I was stubborn, kept my private policy, at some cost to us. Still waiting for my $2,500 premium reduction, so far it has been a $7,900 premium increase.
When you die, the cost basis of an investment with a built in capital gain is "stepped up" to the market value of the investment on the day you die and that cost basis is what your estate or heirs inherit. Basically, the potential capital gain tax that built up during your life dies when you do.
The reason I mentioned Obamacare premium tax credits was that the strategy to optimize them is incompatible with a strategy to maximize the tax value of Roth conversions and 0% LTCGs. Example: For a married couple of 62 year olds who can manage the amount of income that shows up on a 1040, it is quite possible to get $15-$29K/year worth (depending on where you live and your precise income) of Obamacare premium tax credits. A requirement to get these subsidies is to keep your Modified Adjustable Gross Income (not taxable income) below 400% of Federal Poverty Level and above 138% of FPL. For a married couple 4xFPL is $65840 for 2019 (4x$16460). kff.org has a "Health Insurance Marketplace Calculator" where you can enter your specific information to get an idea of what this means for you. The retired, pre-age 65 people I know who have taken Obamacare PTCs into account have significantly changed their plans on how to manage Roth conversions and 0% LTCGs.
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