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footsox writes:

So, if we are trying to sell stocks every year, at about \$60,000, to supplement our \$40,000 in social security, you are telling me I will easily be within the 15%?

No. Considering the methodology AJ outlined in a previous post (but with a correction to that first calculation for the amount of SS income), it seems like you would have plenty of leeway to remain in the 0% bracket for long-term capital gains tax given the \$\$ amounts you provided.

Keep in mind too, that when you sell your stocks (from a taxable account) to generate that \$60,000 for annual cashflow, not all of that is likely to be counted as capital gains. Some portion of that is return of your original basis such that only the remainder is gains. So you may sell some stocks to have \$60,000 in proceeds to use for your annual cash needs. Perhaps (for example) \$20,000 of that \$60,000 in proceeds represents your original cost basis. You are not taxed on the original amount (basis) that you receive back and it is not counted as income. In this example, the remaining \$40,000 in proceeds would be capital gains (\$60,000 proceeds - \$20,000 cost basis = \$40,000 capital gains) and would be counted as capital gains income and taxed accordingly (as either short-term or long-term gains). The strategy and goal of trying to keep your capital gains tax rate at 0% applies only when that capital gains is categorized as long-term (i.e., stocks held for a year or longer).

Applying the math per the example that AJ provided in her post and adjusting for the reality that some portion of the \$60,000 in stock proceeds that you receive would actually be non-taxable return of your original cost basis, means that you have flexibility to pull out even a little more cash without tipping over into the 15% tax bracket. It is fair to say the example that AJ calculated represents a worst-case scenario where 100% of your stock sales are treated as capital gains (possible, but unlikely). The tip is to make sure that any stock sales you make result in qualified long-term gains and not short-term gains (which would be taxed differently at regular income rates unless some of your other stock sales create a loss that can be captured to off-set those short-term gains).

MakingTrax

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