2008 capital gains

[Kram BergGold]

I am assuming that a married taxpayer with $100k of long term gains and no other income or itemized deductions will get no relief from the zero percent cap gain bracket for 15% bracket filers. That once your taxable income goes over the threshold into the 25% bracket that you are not eligible for the zero percent rate. Can anyone confirm this?

[OldJack]

From the 2006 1040 Quickfinder Handbook, page 17-2:

>>The maximum 15% rate for long-term capital gains and qualified dividends is extended through 2010. The 0% rate for taxpayers in the 10% or 15% ordinary income tax brackets will apply in 2008-2010.<<

[jimmcg]

My understanding is that the calculation will follow the standard capital gains worksheet computation so depending upon the amount of gain only the applicable part of it would be subject to the zero rate. I have not read the committee reports or seen much guidance from the Feds on it so maybe someone can shed more enligthenment upon us.

[DonPriebe]

That's not how it works

I am assuming that a married taxpayer with $100k of long term gains and no other income or itemized deductions will get no relief from the zero percent cap gain bracket for 15% bracket filers. That once your taxable income goes over the threshold into the 25% bracket that you are not eligible for the zero percent rate. Can anyone confirm this?

Someone with $100K of LTCG and nothing else pays 5% up to the end of the 15% bracket and then 15% above that. In 2008 they will pay 0% up to the end of the bracket and 15% above that.

Example using 2006 rates, single, standard deduction.
Taxable income $100K - $5,150 - $3,300 = $91,550
Top of 15% bracket = $30,650
Tax at lower rate = 5% * 30,650 = $1,533
Tax at higher rate = 15% * ($91,550 - $30,650) = $9,135
Total tax = $1,533 + $9,135 = $10,668

In 2008 (if the standard deduction, exemption, and 15% bracket was still the same)
Taxable income $100K - $5,150 - $3,300 = $91,550
Top of 15% bracket = $30,650
Tax at lower rate = 0% * 30,650 = $0
Tax at higher rate = 15% * ($91,550 - $30,650) = $9,135
Total tax = $0 + $9,135 = $9,135

Everybody wins. Free money!

[OldJack]

Excellent post Don.. everyone wins except those that don't have LTCG.

[George Boutwell]

Excellent post Don.. everyone wins except those that don't have LTCG.

Everyone wins a maximum of $1,533. Everyone also shares in the tax increases, or deficit increases, needed to make up for those $1,533 tax breaks.

[bigdadder]

Great post Don

Super post Don---Very clear--I appreciate it.

[Corduroy Frog]

Capital Gains Strategy

Congrats to Don Priebe - great display!

Now, to bring capital gains strategy into a new arena: Deferred retirement accounts.

I don't know about the rest of you, but the textbook strategy of deferring income into "your retirement years where you are in a lower tax bracket" is backfiring on many of my customers.

Visions of this income deferral technique were bright when IRAs, SEPs, and 401Ks first began. Easy strategy. Simply take out measured portions of money after you retire, when you will be at a minimal (or even zero) tax bracket. Enjoy your retirement account tax-free, right?

Some of my clients have done this, but the lion's share of people are in high tax brackets AFTER retirement. When these deferred accounts were created (mid 70s to early 80s) no one ever though any portion of Social Security would ever be taxable. Many of these accounts have grown to over $1MM, and the taxpayers trying their best to not take distributions because they already are making more money during retirement than they made 20-30 years ago. When the RMD hits them, they have no choice but to cough up.

And my entire point: retirement distributions are at ORDINARY INCOME rates.

Should not our customers from age 45-65 be building a portfolio of properties? Stocks, real estate, etc.? Then at retirement,

1) enjoy dividends at minimal rates?
2) sell stocks which have lost money, and keep stocks which have gained?
3) not be faced with RMDs?
4) pass on appreciated property at stepped-up basis?

Is this not a superior strategy?? (Assume the current advantages will last
beyond 2011)...

[Joe Btfsplk]

Congrats to Don Priebe - great display!

Now, to bring capital gains strategy into a new arena: Deferred retirement accounts.

I don't know about the rest of you, but the textbook strategy of deferring income into "your retirement years where you are in a lower tax bracket" is backfiring on many of my customers.


)...

In my own case, my income is now a lot more than when I 'retired' from the corporate rat race. However, I believe that taking a lump-sum retirement benefit was still my best choice. The value of my IRA is a lot higher than when I placed it in the Rollover IRA despite my having made a lot of withdrawals. Some of the withdrawals went into paying off my mortgage early, then selling the former home and owner-financing the sale which provides considerable interest income.

By continuing to work with a part-time CPA practice I have continued to earn a few bucks even though not as much as my former salary--which is not an option for all retirees.

In the case of some of my clients, my own strategy has definitely not worked. Two clients got large lump-sum settlements and rollovers from 401Ks, then rolled it over and began making early withdrawals, and investing in businesses which they could not run profitably.

Just like a pair of shoes, one size does not fit all.

[LTS]

CFrog, DPriebe, and Roth IRA

1) i agree about DPriebe - he has good insights here and on other sites.

2) since soc sec became taxable many years ago (and especially since the taxable income levels have not been indexed), i also have found that, for many, the retirement years can have a more complicated and even higher tax consequence than before retirement. your suggestions for the 45-65 year old folks are true. one benefit of the prior tax sheltered contributions (that are now taxed) is the compound future value of the prior tax savings.

3) 20-30 year old taxpayers can put money into a Roth IRA for 5 or more years and have that $million+ account tax free at retirement.

[George Boutwell]

Should not our customers from age 45-65 be building a portfolio of properties? Stocks, real estate, etc.? Then at retirement,

1) enjoy dividends at minimal rates?
2) sell stocks which have lost money, and keep stocks which have gained?
3) not be faced with RMDs?
4) pass on appreciated property at stepped-up basis?

Is this not a superior strategy??

I take it you don't think much of Roth IRA's. Neither do I, given that we don't know what the tax laws will be in five years or what most taxpayers' financial situation will be in 20 years, but if someone has that much certainty to pay a lot of taxes now and on investment income until retirement, a Roth makes more sense to me than this proposal.

[jainen]

a superior strategy

>>Is this not a superior strategy??<<

No, it is not a superior strategy. It shares the same premise, which is seriously flawed.

Retirement planning has undergone a sea change in the last twenty years. Now YIELD is everything, and security is just a historical footnote. It was punched up by the high inflation in the 1970's, which brokers seized upon to sell the fear of "not even keeping up." Individuals began to play the stock market, often through mutual funds. Commissions and fees often exceed the rate of inflation, even before considering the risk of loss.

The idea of lower taxes on capital gains is to encourage investment by offsetting the risk of loss. I don't see people mention that risk much, except after the fact -- burst bubbles, accounting fraud, hostile takeovers, and plain old business failure (which is at an all-time high).

The idea of retirement accounts is quite different, to encourage savings by using compounding to offset modest yields. As the Frog points out, it doesn't make sense to risk stock losses inside an IRA, especially without the tax benefit. And it doesn't make much more sense to build a long-term retirement fund with the same risks and with no compounding outside an IRA.

[George Boutwell]

As the Frog points out, it doesn't make sense to risk stock losses inside an IRA, especially without the tax benefit.

It doesn't make sense to risk stock losses inside an IRA, IF the objective is long-term capital gains. But I have a client whose IRA is yielding 20% annual return by writing covered calls on (mostly) blue chip stocks. The transactions are kept off Schedule D, where they would be taxable as ordinary income anyway.

[Corduroy Frog]

Free Investment

I hope I haven't been misunderstood.

What I am suggesting is the building of property OUTSIDE of a deferred account, for the reasons I listed. The objective is the replacement of ordinary income (retirement distributions) with favored LTCG rates (non-administered investments).

If anyone thought I was recommending high-risk stocks where losses are wasted, I would be every bit as stupid as Jainen thinks I am. That's OK -- I wanted to float the idea and see what everyone thought...

[George Boutwell]

What I am suggesting is the building of property OUTSIDE of a deferred account

In other words, build something that is worth $70 but cost $100 because after-tax dollars were used. And then pay tax every year on the income it produces.

Right. That makes sense. I get it now.