Author Topic: Better understanding of capital gains harvesting?  (Read 2258 times)

clubsoda

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Better understanding of capital gains harvesting?
« on: May 24, 2018, 01:56:57 PM »
I have a bunch of what JL Collins calls "cats and dogs" -- long-held stocks with significant unrealized gains in them. These make up about half of my portfolio.

I am just leaving them alone while I am still making ordinary income. But someday when I am not, I'll need to understand capital gains harvesting. So I recently re-listened to the GCC interview on episode 18 of ChooseFI:https://www.choosefi.com/018-go-curry-cracker-capital-gains-losses-roth-conversion-ladder/

And I also listened to their roundup episode at 18R: https://www.choosefi.com/018r-harvest-long-term-capital-gains-tax-free/
I had to listen to the hypothetical scenario that starts around 22:00 in episode 18R a couple times before it really clicked. Last time I listened to this was a year ago. These things take time to gel.

I also just read this Michael Kitces post: https://www.kitces.com/blog/understanding-the-mechanics-of-the-0-long-term-capital-gains-tax-rate-how-to-harvest-capital-gains-for-a-free-step-up-in-basis/ and found the charts helpful. I am now wondering if I am doing the math right under the new tax code.

Suppose it's 2018 and let's pretend I'm already "retired" and getting $0 in ordinary income. Let's also suppose I am a single filer with no dependents. So, I'm going to do a Roth conversion out of my traditional IRA so that I have some tax-free money in five years. Under the new tax code, $9,526 of ordinary income gets you into the 12% ordinary income bracket. Assume there are no other deductions. So each year, I can convert $9,525 + $12,000 = $21,525 (the amount of the standard deduction), wait five years, then use. Right?

Suppose I need an additional $17,000 each year to live on. I can safely sell $17,000 worth of stocks from a taxable portfolio because I will still be in the 0% capital gains bracket (under a grand total of $38,600) correct?

Am I finally getting it?  :)


gocurrycracker

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Re: Better understanding of capital gains harvesting?
« Reply #1 on: May 26, 2018, 06:58:41 AM »
Am I finally getting it?  :)

Almost. I think you are mixing Total Income with AGI and MAGI and maybe a couple other things.

The standard deduction is $12k. The 10% bracket is the next $9,525. Qualified dividends and long term capital gains get taxed with total income above $50,600.

If you make a Roth conversion up to the 12% bracket you are paying some tax at 10%. That is pretty good, but it isn't zero tax.
Limit the conversion to the Standard Deduction ($12k, not a penny more) to get 0%.

You can then realize long term capital gains of up to $50,600 minus whatever other income you have (including Roth conversion.) With only a $12k Roth conversion you could realize $38,600.

This is GAINS. If your investment has doubled since you bought it, you could sell $77,200 worth... half is gain, half is basis.

These transactions will be taxed by your State, if applicable. They will also impact ACA subsidies, if applicable.