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Author: nevercontent Big red star, 1000 posts Ticker Guide CAPS All Star Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: LT Capital Gains in Retirement Date: 12/3/2013 7:59 PM
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Hello everyone! I have a hopefully quick pair of questions: my understanding is that in 2014 there is a zero percent federal tax rate on long-term capital gains and qualified dividends for joint income less than $73,800. I'm looking to retire soon, and will initially be drawing down from a taxable account. We'll have almost no traditional income, though there will be some short-term capital gains from short sales (primarily written puts) -- but definitely far less than $73,800.

So am I correct that we'll pay zero federal taxes on qualified dividends and long-term capital gains? And if so, do the qualified dividends and long-term capital gains get factored into the $73,800 limit? e.g., if we earned $10,000 a year in options income and $80,000 in qualified dividends and long-term capital gains, would we still pay zero federal tax on the dividends and LT capital gains? Or do we need to keep the combined total below $73,800?

Thanks for the help!
Neil
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119621 of 121061
Subject: Re: LT Capital Gains in Retirement Date: 12/3/2013 8:19 PM
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my understanding is that in 2014 there is a zero percent federal tax rate on long-term capital gains and qualified dividends for joint income less than $73,800.

That has been the case for many years now - although the $73,800 figure has been adjusted annually for inflation, and from time to time through legislation. It's nothing new.

So am I correct that we'll pay zero federal taxes on qualified dividends and long-term capital gains?

Yes, to a point.

And if so, do the qualified dividends and long-term capital gains get factored into the $73,800 limit?

Yes, they do.

Also, that 73k figure is taxable income, not total income. So it is your income after subtracting personal exemptions and either itemized or standard deductions. So your total income could be significantly more than $73k and you'd still be under $73k in taxable income.

Finally, if your qualified dividends and LTCG push you over the $73k figure, only the amount over that would be taxed. You'd still get the benefit of a 0% rate on the amounts under $73k.

There are many good discussions of this all over the internet.

--Peter

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Author: conifer Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119623 of 121061
Subject: Re: LT Capital Gains in Retirement Date: 12/4/2013 8:33 AM
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Some states do tax long term gains, regardless of income level. My state does, and it was a surprise the first year I had to pay about 5% on LTgains, even though my income was such for zero federal tax on those gains.

conifer

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119625 of 121061
Subject: Re: LT Capital Gains in Retirement Date: 12/4/2013 1:43 PM
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Neil
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.

BruceM

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