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In 2020 I have some significant unrealized capital gains and am researching strategies to minimize my tax bill. I have a couple tax questions.

1. I am planning early retirement at the end of 2020. It looks like if I can keep my wife and my income under 80,000 for 2021, then we would fall in the 0% long term capital gains rate. Is that really the case that I would owe 0% on the very large capital gain?

2. I have read some conflicting information that capital gains is added to your regular income in figuring your income bracket. I don’t think that is the case. Can someone knowledgeable about this please confirm. Did it used to be this way, or is what I read just wrong?

3. Will things likely change in 2021? How quickly can a new administration change tax rules, and is that likely to happen in 2021. Would hate to retire from working to keep income under $80,000 and then realize the large long term capital gains in January 2021 only to realize later that the rules changed and I now owe a large capital gain tax bill.

Any help is appreciated.
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Lifted from the link and dealing with 2019 brackets....

Let’s say you’re married and this year your taxable income (which is calculated after subtracting out your itemized deductions or standard deduction) is going to be about $60,000. You now have room for more income before you hit the 15% capital gains bracket; $18,750 of room to be exact.

https://www.thebalance.com/how-to-use-the-zero-percent-tax-r...

So in your case, if you earn $80,000, essentially have zero room for the 0% cap gains rate. If you earn $40,000, then you can sell $40,000 worth and owe zero on cap gains.

JLC
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1. I am planning early retirement at the end of 2020. It looks like if I can keep my wife and my income under 80,000 for 2021, then we would fall in the 0% long term capital gains rate. Is that really the case that I would owe 0% on the very large capital gain?

Only if the capital gain plus your taxable ordinary income is below $80,000 for MFJ. Any capital gain that's above $80,000 when added to your ordinary income will be taxed at 15%; any above $496,600 will be taxed at 20% and any investment income (capital gains, dividends, interest, etc.) above $250k will be charged an extra 3.8% surtax. So, if you have a capital gain of $500k and ordinary income of $74.8k and take the standard deduction of $24,800, your taxes will look like this:

$24,800 ordinary income - not taxed due to standard deduction
$19,750 ordinary income taxed at 10% = $1,975
$30,250 ordinary income taxed at 12% = $3,630
$30,000 capital gain taxed at 0% = $0 (this is the part up to $80k)
$220,000 capital gain taxed at 15% = $33,000
$196,600 capital gain taxed at 15% + 3.8% = $36,961
$53,400 capital gain taxed at 20% + 3.8% = $10,039

Total tax bill on $574.8k in taxable income: $85,605 or 14.9%

2. I have read some conflicting information that capital gains is added to your regular income in figuring your income bracket. I don’t think that is the case. Can someone knowledgeable about this please confirm. Did it used to be this way, or is what I read just wrong?

You are misunderstanding it. It's always been that way. You count your ordinary income first and then you add the capital gains on top of that to figure out what capital gains bracket your capital gains are taxed at.

3. Will things likely change in 2021? How quickly can a new administration change tax rules, and is that likely to happen in 2021. Would hate to retire from working to keep income under $80,000 and then realize the large long term capital gains in January 2021 only to realize later that the rules changed and I now owe a large capital gain tax bill.

Well, the TCJA was initially introduced to the House of Representatives on Nov 2, 2017 and signed into law on Dec 22, 2017.

AJ
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Will things likely change in 2021? How quickly can a new administration change tax rules, and is that likely to happen in 2021.

As AJ pointed out, a new administration--the Trump one--got enacted a major tax law rewrite pretty quickly as such things go.

Whether the same level of rewrite--or any adjustment at all--can be done as quickly in 2021 will depend on which side wins the current election and how sharply it wins.

Eric Hines
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Would hate to retire from working to keep income under $80,000 and then realize the large long term capital gains in January 2021 only to realize later that the rules changed and I now owe a large capital gain tax bill.

One other point. *Most* of the changes from major re-writes of tax laws don't take effect until the following year. It is possible, especially if the law is passed early in the year, that the changes could be effective for the year in which the law was passed. But in most cases, so that people don't get hit with negative retroactive changes like you are describing, the major changes take effect the following year. Sometimes, when changes are beneficial, or it's just an extension of tax laws that have expired, the changes are made retroactive. But, generally, if you sell in January, 2021, you are unlikely to owe a larger amount of taxes due to changes in the tax law made in 2021.

That said - Congress does make the rules, and doesn't have to follow previous precedents that they have set - so it could be possible that the new Congress would make changes retroactive.

AJ
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