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Subject:  Re: LT Capital Gains in Retirement Date:  12/4/2013  1:43 PM
Author:  BruceCM Number:  119625 of 127753

This is a question I spoke to on another discussion forum. This is my response...hope it helps...

The American Taxpayer Relief Act of 2012 made permanent the 0% tax rate on long term capital gains (LTCG) and qualified dividend income that falls within the 15% or 10% tax bracket. This means that those who file single and whose taxable income (line 43 of the form 1040) is below $36,250 for 2013 will have 'headroom' they can use for tax free capital gains. This amount doubles to $72,500 for those married filing jointly.

For example, a single retired person has an adjusted gross income from the taxable portion of their social security and investment income of $50,000. Their personal exemption and itemized deductions total $16,000, leaving them with a taxable income (form 1040 line 43) of $34,000. This means they could sell enough appreciated mutual funds/stocks to provide $1,250 of LTCG, and their federal income tax would not increase. However, they would need to be careful of other effects this could have. For example...

1. State income tax may increase

2. More of their SS may have to be included as income

3. If not yet age 65 (Medicare) they may lose part of their subsidy for the ACA mandated health plan (I have no idea what these levels are...only that susidies are reduced at higher modified AGI).

4. If the individual works, has a retirement plan at work and is not yet 70.5, the ability to deduct TIRA contributions may be lost or reduced.

But the important point here is that even though the LTCG may be tax free, it still increases one's AGI, which could have an adverse financial affect somewhere else.

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