Income tax vs gain tax strategy question

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#1
bspooky Dryer sheet wannabe Join Date: Nov 2013 Posts: 11	Income tax vs gain tax strategy question We are looking at about $45k in gains tax in 2014 unless we either A) cost that out over several years and hold positions we would rather sell now or B) rip the bandaid off and pony up and pay it to divest. In looking at a way to do B) without the $45K hit.... If in 2014 we contributed to a 457 to get $91,000 salary down to (barely) under the $72,500 couple 15% tax bracket (though that salary is one earner, one of us wouldn't earn anything in 2014 but we should I think still be able to file jointly), wouldn't that drastically reduce the $45K in gains tax? Or will selling off that much gains change the income level such that we bump up in tax rates anyway? We don't want to let the tax tail wag the dog, but I also don't want one of us to work in 2014 and earn $40K just to turn around and pay $45K in gains tax if one of us could earn 0 and we can drastically reduce the $45K tax liability. __________________ __________________

Today, 12:13 PM	#2
GrayHare Full time employment: Posting here. Join Date: Nov 2011 Posts: 824	One way: you can donate appreciated assets to charity and pay no cap gains tax but still take a deduction for the full value. __________________ __________________

Today, 02:39 PM	#3
karluk Recycles dryer sheets Join Date: Jan 2013 Posts: 157	Quote: Originally Posted by bspooky  We are looking at about $45k in gains tax in 2014 unless we either A) cost that out over several years and hold positions we would rather sell now or B) rip the bandaid off and pony up and pay it to divest. In looking at a way to do B) without the $45K hit.... If in 2014 we contributed to a 457 to get $91,000 salary down to (barely) under the $72,500 couple 15% tax bracket (though that salary is one earner, one of us wouldn't earn anything in 2014 but we should I think still be able to file jointly), wouldn't that drastically reduce the $45K in gains tax? Or will selling off that much gains change the income level such that we bump up in tax rates anyway? We don't want to let the tax tail wag the dog, but I also don't want one of us to work in 2014 and earn $40K just to turn around and pay $45K in gains tax if one of us could earn 0 and we can drastically reduce the $45K tax liability. The federal tax brackets are adjusted every year for inflation. The IRS recently announced the tax brackets for 2014. For a married couple filing jointly, the top of the 15% bracket will be $73,800. In addition you have to take into consideration exemptions and deductions. The personal exemption will be $3,950 in 2014 and the standard deduction will be $12,400. I don't know your tax situation, but assuming that you take two personal exemptions and the standard deduction, you will be in the 15% tax bracket as long as your MAGI is no larger than $73,800 + 2 * $3,950 + $12,400 = $94,100. On the income side, you anticipate $91,000 in wages, which you can reduce by $17,500 by maxing out your 401k contributions. (If you will be 50 or older in 2014, the maximum is $23,000. You don't say whether you are eligible for the age 50 catch-up contributions.) So you can get your taxable income down to at least $91,000 - $17,500 = $73,500 by maxing out 401k contributions. This would allow you to realize $94,100 - $73,500 = $20,600 in capital gains and still remain in the 15% bracket, which means paying no federal taxes on $20,600 of capital gains, assuming that it is all long term capital gains. I would say it's definitely worth your while to contribute the maximum to your 401k in a year like 2014, when you anticipate realizing a large amount of capital gains. IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - Forbes __________________

Today, 03:07 PM	#4
pb4uski Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Nov 2010 Posts: 5,215	Lets say you do nothing. In 2014 if you MFJ you would have $91,000 of earnings less $12,400 standard deduction less $7,900 of personal exemptions for TI of $70,700 compared to the $73,800 top of the 15% tax bracket, so that would give you only $3,100 of room for tax free capital gains. So if you make either 401k contributions or HSA contributions or itemized deductions in excess of the standard deduction or other items that reduce your TI for each $1 you get an additional $1 in tax free LTCG. As always, YMMV. __________________ If something cannot endure laughter.... it cannot endure. Patience is the art of concealing your impatience.

Today, 03:19 PM	#5
Animorph Thinks s/he gets paid by the post Join Date: Jul 2005 Posts: 2,441	Spreading sales over this year and 2014 shouldn't have you holding things too long. You want to consider very carefully if you can stay in the 0% cap gains rate while doing this. Can you sell anything taxable with a loss to balance out the gains a bit? __________________

Today, 03:24 PM	#6
bspooky Dryer sheet wannabe Join Date: Nov 2013 Posts: 11	Quote: Originally Posted by karluk  ... This would allow you to realize $94,100 - $73,500 = $20,600 in capital gains and still remain in the 15% bracket, which means paying no federal taxes on $20,600 of capital gains, assuming that it is all long term capital gains. I would say it's definitely worth your while to contribute the maximum to your 401k in a year like 2014, when you anticipate realizing a large amount of capital gains. IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - Forbes First, thank you so very much for a very informative and easy to understand post. I really appreciate it. We will definitely be maxing out to the allowed $23K contributions in 2014, and yes, these are long term (all over a year, actually most are over several years) gains. It is hard to know when to take the gains and pay gains tax, and when to hold. We have 350K of long term gains and of course can capture some of that with taking some offsetting losses to counterbalance, but will still be left with the choice of paying tax on a large amount of long term gains or holding it, hope the value holds, and counterbalancing with future losses to minimize the tax hit. __________________

Today, 03:28 PM

#7

bspooky Dryer sheet wannabe Join Date: Nov 2013 Posts: 11

Quote: Originally Posted by Animorph  Spreading sales over this year and 2014 shouldn't have you holding things too long. You want to consider very carefully if you can stay in the 0% cap gains rate while doing this. Can you sell anything taxable with a loss to balance out the gains a bit? Thanks all for the rep,it's so far. Yes we can balance vs some losses, but we are still looking at $250,000-ish in gains after that. Balancing that large amount vs losses over the upcoming years of course runs the risk of those gains disappearing if the holdings lose value in the meantime.