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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120780  
Subject: Long term cap gains tax rate - 0% Date: 11/28/2012 6:01 PM
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Hi,

Any help here would be appreciated.

Tax year: 2011

If the LT cap gains tax rate is zero for 15% tax bracket, why does my 2011 Turbo Tax show the LT cap gains I had on line 13 if my TAXABLE INCOME was well below the $69,000 at the top of the 15% tax rate bracket for married filing jointly?

I usually trust Turbo Tax and somehow doubt this is their mistake. What mistake might I be making?

Thanks,
RB
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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 117015 of 120780
Subject: Re: Long term cap gains tax rate - 0% Date: 11/28/2012 6:20 PM
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If the LT cap gains tax rate is zero for 15% tax bracket, why does my 2011 Turbo Tax show the LT cap gains I had on line 13 if my TAXABLE INCOME was well below the $69,000 at the top of the 15% tax rate bracket for married filing jointly?

I usually trust Turbo Tax and somehow doubt this is their mistake. What mistake might I be making?

=========================================
The only mistake is understanding where the zero rate comes into play.
Capital gains are still reported on line 13 of page 1, 1040, and like qualified dividends, are included in your adjusted gross income, and for that matter, your taxable income on page 2.

The zero rate on those items comes into play on the "qualifed dividend and capital gain tax worksheet", which TurboTax will generally handle quite well.

Bill

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 117016 of 120780
Subject: Re: Long term cap gains tax rate - 0% Date: 11/28/2012 6:44 PM
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why does my 2011 Turbo Tax show the LT cap gains I had on line 13

Bill has already answered your question. Just popping in to remind all that since most states use Federal AGI as a starting point for determining state taxable income, and none that I know of is also applying a zero rate to these gains, it will increase your state tab.

Phil
Rule Your Retirement Home Fool

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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 117017 of 120780
Subject: Re: Long term cap gains tax rate - 0% Date: 11/28/2012 6:46 PM
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Thanks very much Bill. That helped a lot.

Can they make the tax code any more complicated? It seems to me that the taxable income line 43 should calculate your actual tax liability. For instance, if it is $29000 on line 43 you should be able to look that figure up on the tax table, under MFJ, and see your tax of $3,504. But apparently qualified divs and capital gains are subtracted from the taxable income INVISIBLY!

Don't you think they should at least have a line showing the subtraction of these figures so that the taxable income line could directly be calculated from the tax table?

Thanks again.
RB

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 117018 of 120780
Subject: Re: Long term cap gains tax rate - 0% Date: 11/28/2012 6:55 PM
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Don't you think they should at least have a line showing the subtraction of these figures so that the taxable income line could directly be calculated from the tax table?

Such a line exists. On the worksheet Bill mentioned.

I hate to be the one to break it to you, but the IRS has returns other than yours to process. For example, returns of people who wind up above the top of the 15% bracket but still get some benefit from the zero rate until they reach the top of that bracket. The worksheet, which is very visible to someone doing the return by hand and available in software's worksheets if you want to look at it, is usable by every filer.

Phil
Rule Your Retirement Home Fool

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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 117027 of 120780
Subject: Re: Long term cap gains tax rate - 0% Date: 11/30/2012 8:51 PM
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Thanks Phil. Good points.

On the same subject, but for different reasons, let me know if anyone sees any flaws in this investment tax savings strategy:

First of all, I don't believe in letting the tax tail wag the investment dog, but here is an exception.

Tax payers in the 10 and 15% tax brackets have had a zero long term capital gains tax rate for 5 years now. It is set to expire and go to 10% next year. But even regardless of it expiring next year, this would work.

Sell all stocks that one has a gain on this year in taxable accounts and buy them back either right away, not at all if one doesn't want the stock any more, or on a dip if possible.

That will reset ones basis to zero.

Example:
So if I have a stock I paid $50 x 200 shares = $10K, and it is now at $75, my basis is $10K, sale price $15K, $5K gain. If I sell it this year, with no cap gains tax for 15% tax brackets, and buy it back for the same $15K, my basis is now $15K instead of $10K.
In a future year when I sell it for real, if the cap gains tax at that time applies to me, I will save $5K x the tax rate.

Sound good?
RB

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 117030 of 120780
Subject: Re: Long term cap gains tax rate - 0% Date: 12/1/2012 11:45 AM
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First of all, I don't believe in letting the tax tail wag the investment dog, but here is an exception.

Tax payers in the 10 and 15% tax brackets have had a zero long term capital gains tax rate for 5 years now. It is set to expire and go to 10% next year. But even regardless of it expiring next year, this would work.


Actually, the 10% bracket is scheduled to go away, and the lowest rate will be 15%. But long-term gains would be taxed at a maximum 20%, for those above the 15% bracket. But I don't think that affects your strategy.

Sell all stocks that one has a gain on this year in taxable accounts and buy them back either right away, not at all if one doesn't want the stock any more, or on a dip if possible.

That will reset ones basis to zero.


To be picky, it doesn't reset your basis to zero, it gives you a new basis equal to current value, and unrealized gains of zero.

A couple of potential problems:
1. You have to make sure that your realized gains don't put you above the 15% bracket.
2. The realized gains are included in your income. For retirees in the lower brackets who can use this strategy, this can increase the amount of Social Security benefits that are taxable. And there may be other phaseouts affected too.
3. And if you have capital loss carryovers from prior years, you're going to burn those up in a strategy that saves you zero current taxes, by selling stocks you want to keep.

Beyond that, the plan would work as you suggest.

Bill

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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 117033 of 120780
Subject: Re: Long term cap gains tax rate - 0% Date: 12/1/2012 3:24 PM
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Thanks Bill.
Yes, thanks for being picky about my casual comment about basis being reset to zero. Silly.

Thanks for the potential problems list. None apply to me so I think I'll go for it! I thought about #1 after I posted. Taxes can be tricky; there are so many moving parts! So I did some calculations and I'll still be well under the $70K taxable income cut off point for MFJ 15% bracket.

Thanks,
RB

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 117035 of 120780
Subject: Re: Long term cap gains tax rate - 0% Date: 12/2/2012 12:00 AM
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Don't forget the impact on state taxes. In many states capital gains are taxed at regular income rates.

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