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The federal capital gains and income tax rates are expected to change sometime in the next year or two. How confident should an investor be that the tax rates existing on Jan 1 will be the same on Dec 31, in other words that no mid-year or retro-active changes will slipped in? I understand this is possible, but has it ever happened?
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You are asking what Congress will do. How can anyone know?

So far I'm hoping the "over $400k/yr" promise will keep the 15%capital gains rate for most of us. But there is no guarantee.

The end of stepped up basis (suggested but not yet before Congress) could have many of us paying those penalty capital gain rates as estate taxes. That seems the greatest threat.
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So far I'm hoping the "over $400k/yr" promise will keep the 15%capital gains rate for most of us. But there is no guarantee.

Well, there are taxpayers who make less than $400k/year who are already paying more than 15% in LTCG, due to the NIIT, which kicks in at income as low as $125k, depending on your filing status. That said, the cap gains rate proposal on the table will only impact those with more than $1MM in income.

The end of stepped up basis (suggested but not yet before Congress) could have many of us paying those penalty capital gain rates as estate taxes.

Why do you call them 'penalty capital gains rates'? As proposed, it's not a penalty - it's adding a new bracket to the already indexed capital gains rates. That said, I doubt that 'many' is the correct characterization of those that will end up paying, due to the exemptions that will need to be carved out in order to get enough votes for any proposal to pass. And don't forget, the currently high estate exemption is already scheduled to return to the prior levels as of Jan 1, 2026, along with the expiration the rest of the TCJA for individuals.

AJ
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Penalty rates: The proposed capital gains rate over that max of $1MM is over 40%. That's quite a penalty in my view.

Stepped up basis meant that your accumulated gains could be passed on to your heirs tax free. Their cost basis was market value on your date of death. Many of us have accumulated capital gains with this tax loop hole in mind.

Yes, there is also a proposal to reduce the estate tax exemption, which at one time was $600K. In 2025 the old law takes it to $3MM as I recall from the current $11+MM.

The one plus is that the capital gains taxes paid by the estate are deductible from estate taxes in at least one proposal.

But who know what part of this will make it through Congress.
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With constant changes, it is very difficult to make a longish term estate plan.

When my father-in-law passed away, the B part of an A/B trust was established. As it turned out, the B trust was unnecessary and added complexity. I believe that it was Paul that told me to forget being annoyed by not being able to predict the future.
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Penalty rates: The proposed capital gains rate over that max of $1MM is over 40%. That's quite a penalty in my view.

So, make less. The fact that it's being proposed to be the same as the ordinary rates on investment income seems quite reasonable to me.

Stepped up basis meant that your accumulated gains could be passed on to your heirs tax free. Their cost basis was market value on your date of death. Many of us have accumulated capital gains with this tax loop hole in mind.

Yep, and tax laws change. For example: Many people accumulated pre-tax retirement accounts with the intent to pass them along to their kids. Then along came the SECURE Act, which could impose significant tax burdens to beneficiaries because of the 10 year requirement to disburse accounts. So people are having to re-think that strategy. Same thing will happen if this proposal becomes law - there will be a lot of re-thinking of inheritance strategies.

In 2025 the old law takes it to $3MM as I recall from the current $11+MM.

The TCJA doubled the exemptions. As of Jan 1, 2026, the TCJA provisions expire and the reversion to the old law will cut it in half, to ~$5.5MM (plus adjustments).

AJ
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Paul
Stepped up basis meant that your accumulated gains could be passed on to your heirs tax free. Their cost basis was market value on your date of death. Many of us have accumulated capital gains with this tax loop hole in mind.

AJ
Yep, and tax laws change. For example: Many people accumulated pre-tax retirement accounts with the intent to pass them along to their kids. Then along came the SECURE Act, which could impose significant tax burdens to beneficiaries because of the 10 year requirement to disburse accounts. So people are having to re-think that strategy. Same thing will happen if this proposal becomes law - there will be a lot of re-thinking of inheritance strategies.

I'm sure (I hope) that any changes to stepped up basis are getting a government microscopic and field glasses consideration for any impacts on the market.
Indeed, I might just sell if that were the case. My income is low enough to make more financial sense for me to take the tax hit now instead of heir(s) in the future.

nag
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Penalty rates: The proposed capital gains rate over that max of $1MM is over 40%. That's quite a penalty in my view.

So, make less. The fact that it's being proposed to be the same as the ordinary rates on investment income seems quite reasonable to me.


Indeed, if you do wind up paying 40+% on capital gains over $1MM in an estate, in addition to 40+% in estate tax over $5.5MM, that will be strong incentive to stay below those numbers. Make sure you max that 15% capital gains rate every year. And either spend it or give it away.

I think we can see those estate planning advisors being pretty busy if all this comes to pass as some see it happening.

Of course we hope cooler heads will prevail and compromises will be less severe.
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Ironic...
Rich folks have been taking these tax breaks for years with far more dollars in the game.

Us 'regular' folks saw that and decided, if it's good enough for them, good enough for me.

Oh, well, we deal with whatever the deck decides in the future.

nag
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Indeed, I might just sell if that were the case. My income is low enough to make more financial sense for me to take the tax hit now instead of heir(s) in the future.

OK. So you start selling and realizing the capital gains at the lowest rates you can manage for your family. Then what do you do with the money? If you put it back in the market, that takes away the majority of the selling pressure on the market. If you spend it, that's switching to a fiscal stimulus that would help markets go back up. It only puts downward pressure on the markets if you stuff the proceeds into a mattress.

--Peter
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Peter
Nope, under the mattress or bank it.

nag
when you have enough to leave to heirs, either spend it or bury it is my thinking
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That was my point,
if tax laws change, we all might and should change our strategy.

If there's no cost basis step up, what is the point of holding securities at a late part of your life?

nag
I'd take the hit, a small one
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Rich folks have been taking these tax breaks for years with far more dollars in the game.

Us 'regular' folks saw that and decided, if it's good enough for them, good enough for me.


Is "rich" defined as more than you have ?

People who post on the Millionaire Fools board are only "regular folks" in their own minds.
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Someone said to "Max out the 15% every year?" Can someone please expand on that. I supposed it means, I should sell stocks if I can keep it in the 15% rate? So, I would have to figure in my normal income first? And then I could know what the amount of selling stocks could be?

Let me give you an example.. We only have income from social security every year. Let's say $40,000 per year. Our plan was to supplement that by selling stocks every year into our old age. Let's say we are trying to live on $100,000 per year -- $40,000 from SS, and $60,000 from selling stock. Can you apply that 15% "max out" rule to our situation? Thanks.

Footsox
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I would have though that the rule of maxing out the 15% bracket each year applied to IRA withdrawals. This applies most to those with large IRA balances that will be facing large Required Minimum Distribution (RMD) amounts when they reach the age those start. Assuming the money is not needed the best thing to do would be a ROTH conversion of the amount from the IRA to max out the 15% bracket. That at least protects it from additional taxes on future gains.
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I would have though that the rule of maxing out the 15% bracket each year applied to IRA withdrawals.

Except that IRA withdrawals are taxed as ordinary income, and until 2026, or the law changes them again (whichever comes first) those brackets are: 10%, 12%, 22%, 24%, 32%, 35% and 37%

AJ
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I supposed it means, I should sell stocks if I can keep it in the 15% rate? So, I would have to figure in my normal income first? And then I could know what the amount of selling stocks could be?

Well, kind of. As with all things having to do with taxes, the devil is in the details. Since you said "we", I'll assume you are MFJ. For 2021, LT capital gains rates for MFJ are 0% up to $80,800 in taxable capital gains income, 15% for $80,801 - $501,600, and 20% for $501,601+ - except that there is a surtax of 3.8% that starts at $250,000 for MFJ. So, the real LT capital gains tax brackets are:

$0 - $80,800 0%
$80,801 - $250,000 15%
$250,000 - $501,600 18.8%
>$501,600 23.8%

We only have income from social security every year. Let's say $40,000 per year. Our plan was to supplement that by selling stocks every year into our old age. Let's say we are trying to live on $100,000 per year -- $40,000 from SS, and $60,000 from selling stock. Can you apply that 15% "max out" rule to our situation?

Well, given that in 2021 for MFJ who are both over 65, there is a $27,700 standard deduction, it's actually quite likely that you would still be in the 0% LTCG bracket. 85% of your SS income would be taxable, so that's $20,400 of taxable income. But your standard deduction is $27,700, which is $7,300 more than your taxable SS income. So the first $7,300 of capital gains would be covered by the standard deduction, which means you would have to have another $80,800 (in addition to the $7,300) in capital gains to even have any capital gains in the 15% bracket. Since you are only selling $60k of stock, even if that entire amount was a gain because you had a $0 basis, you still wouldn't reach the 15% capital gains bracket.

That said - if you want to leave your stocks to heirs, and you are concerned about the proposal for capital gains to be taxed upon inheritance impacting their inheritance, you could sell enough stock to get your taxable capital gains up to the top of the 0% bracket without having to pay a penny in income taxes. In this example, that would be selling enough stocks to generate $88,100 in capital gains ($80,800 for the 0% capital gains bracket, plus $7,300 that's covered by the standard deduction). Let's say that was $120k in stock. Then you could take the $60k that you don't need for your living expenses, and buy back the stocks that you had sold. That way, you would have $60k in stock with a $60k basis, instead of $60k in stock with a $15,590 basis, and, if the proposal is law by the time you die, your heirs would only have to pay capital gains taxes on the gains above $60k, instead of the gains above $15,590

If you have even more stock that has a low cost basis, and you want to pay the 15% capital gains taxes, instead of your heirs having to pay it when they inherit, you could sell enough stock to generate up to $250k in taxable capital gains.

AJ
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AJ writes:

"...given that in 2021 for MFJ who are both over 65, there is a $27,700 standard deduction, it's actually quite likely that you would still be in the 0% LTCG bracket. 85% of your SS income would be taxable, so that's $20,400 of taxable income."

I think that first calculation is off. The SS income is $40,000. 85% of SS income would be $34,000 in taxable income.

So after applying the $27,700 standard deduction, you would have $6,300 in taxable income based on SS. To remain in the 0% capital gains bracket, you could have up to $74,500 in capital gains ($80,800 - 6,300 = $74,500). Not quite as much per AJ's calc, but as pointed out, still plenty of buffer for your anticipated $60,000 cap gains sale to fall with in the 0% cap gains bracket.

MakingTrax
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The use up your 15% capital gains bracket refers to people who have over $1MM in accumulated capital gains.

If stepped up basis goes away, amounts over $1MM will be subject to 40+% capital gains tax (in some proposals yet to be adopted in Congress).

Those people would be better off to work off the amounts over $1MM by taking capital gains at the 15% rate (or less) whenever they have the opportunity.

If in addition your estate exceeds the new estate tax exemption of some say $5MM, you can be paying 40+% federal estate tax in addition to 40+% capital gains tax. Those are numbers you definitely want to stay below if you can figure out how. Spend it. Give it away as to charity? Or go see a good estate planner.

As to millionaires on these boards, it is very possible to get $1MM in your IRA if you start saving early, invest wisely, and stick to the program through thick and thin. There are probably a lot more millionaires on these boards (by the time they reach retirement age) than you realize.
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As to millionaires on these boards, it is very possible to get $1MM in your IRA if you start saving early, invest wisely, and stick to the program through thick and thin. There are probably a lot more millionaires on these boards (by the time they reach retirement age) than you realize.

This is a red herring with respect to capital gains taxes. IRAs already don't get a step up because they are not subject to capital gains taxes - they are subject to ordinary income taxes, and now, must be fully disbursed within 10 years of the decedent's death. So those with $1MM+ IRAs don't need to worry about capital gains taxes on inheritance, nor about using up their 15% cap gains bracket, due to those IRAs. They may want to worry about their heir's ordinary income rates when disbursing the accounts vs. their ordinary income rates if they disbursed before their death. But unless they choose to move the money into taxable accounts, capital gains taxes are irrelevant.

AJ
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Thanks for all the replies. So much great information! A little more about us - Yes, Married filing jointly, very little in IRA's. Yes, we have over $1MM in capital gains.

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%?

As for our estate - both kids are adults, 50's, both have great incomes and don't need any inheritance from us. We have tried many times to get them interested in the stock market, with no interest, so why would we leave our stock market gains to them. Interesting question, right? But thanks for the info on estate taxes as well. We might be more amicable down the road.

Footsox
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As for our estate - both kids are adults, 50's, both have great incomes and don't need any inheritance from us. We have tried many times to get them interested in the stock market, with no interest, so why would we leave our stock market gains to them. Interesting question, right?

We have wrestled with this question as well, though frankly I am hoping we live long and well enough to spend most of what we have. Our kids are still in their 20's, though Eldest is doing well both at work and in the market. We chose to front end the kids' inheritance by matching their earned income up through college in the form of a Roth IRA contribution, which has also helped with their understanding of saving for retirement, the stock market and the importance of saving/investing/compounding. We also paid for college at the undergraduate level. In part we did this because we retired early and our assets would make it difficult for them to get financial aid. They were told not to expect an inheritance.

But who else are we going to give it to? Not the gov't, thanks. We have done plenty of gov't funding already. It makes me happiest thinking it could make life easier for them, or they can decide to give it away should they chose to do so. If there is going to be much left it will be because DH and I were taken out together too early in retirement, such as when traveling together on the highway. If that happens, will we have been able to give them in full the financial education they need?

And they were part of the frugal lifestyle we chose to pursue, so that we could do things like retire early and pay for college, thus in some ways they helped us save the basis of the investments. Youngest in particular questioned why we didn't have fancy things like his friends, though in senior year of high school he told me he understood finally why we did this. So many of his friends were panicked about how to pay for college, and while he didn't get a car from us at 16, he didn't have the stress they were now facing. Maybe eventually we will have grandkids we can do that for too.

As all of us get older, and I see them more on track to financial success, (Youngest just graduated college,) we will likely direct a good portion of our estate elsewhere or put it away for grandchildren that may appear, but for now, it's going to the kids. And if Youngest decides to continue on his pursuit to save the environment in lieu of a fat paycheck, I am glad that we can subsidize that.

Those are some of our answers to that question.

FWIW,

IP
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As to millionaires on these boards, it is very possible to get $1MM in your IRA if you start saving early, invest wisely, and stick to the program through thick and thin. There are probably a lot more millionaires on these boards (by the time they reach retirement age) than you realize.

If this is for me, I doubt it. I know some of them IRL and realize the rest. But none should pretend they are just regular folks.

Have you ever seen the new version of the movie Sabrina ? I don't have a million dollars ;)
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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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Most of us who have stock holdings that we would sell and have long term capital gains will also have qualified dividend income....don’t these get added to the lt capital gains in figuring the 0%,15%,20% brackets?? I don’t see this addressed in this thread.
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rrwfl45 writes:

Most of us who have stock holdings that we would sell and have long term capital gains will also have qualified dividend income....don’t these get added to the lt capital gains in figuring the 0%,15%,20% brackets?? I don’t see this addressed in this thread.

That's true. Most folks with a large taxable stock (& bonds for diversification) holding account probably also generate some interest and unqualified ordinary dividend that also get taxed as regular income. Sometimes the amount in all those categories can be sizable and definitely need to be taken into account while managing both the income brackets and the capital gains brackets.

The examples/calculations provided in the thread offer a very basic and simplified explanation. Footsox would need to provide more detail to get into the nitty gritty of sorting out cost basis, short vs long holdings, dividend categories, etc. for his specific scenario.

MakingTrax
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Worse than that, all of your other income counts in setting capital gains rates.

Yes, a married couple can pay 0% on capital gains up to $80k. But only if they have no other income. Any other income counts toward that $80k limit.
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Many "regular folks" are able to accumulate millions by following TMF guidelines. That is the TMF way. They do live comfortably but most are still regular folks.

In the beginning it is a struggle. They are not big spenders. They are not like everyone else.
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Yes, a married couple can pay 0% on capital gains up to $80k. But only if they have no other income. Any other income counts toward that $80k limit.

Well, it's really $80.8k for 2021. And you also have to consider their deductions. So even for a couple MFJ who takes the minimum standard deduction of $25.1k (without adjustments for age or vision), they could have up to $105.9k in capital gains and still remain in the 0% capital gains bracket if they have no other income.

AJ
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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).

Yes, this is exactly correct. As you point out, I gave a worst case scenario with a $0 cost basis, not knowing anything about what the cost basis actually is. But unless it was a stock that provided significant return of capital, it's unlikely to have a $0 cost basis.

And thanks for the correction on the initial math mistake.

AJ
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Gosh, thanks for that explanation. I would never have known otherwise.
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Many "regular folks" are able to accumulate millions by following TMF guidelines. That is the TMF way. They do live comfortably but most are still regular folks.

In the beginning it is a struggle. They are not big spenders. They are not like everyone else.


I totally agree. Many are DYI-selfers when possible, frugle and read read read about how to best save and invest. Many have had hard lives growing up and learned to always save for those inevitable rainy days.

It also depends on where you live.
HCOL area? 1 million is a pittance for a house or apartment.

nag
a 'regular person' for my location
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Many "regular folks" are able to accumulate millions by following TMF guidelines. That is the TMF way. They do live comfortably but most are still regular folks.

When one's household wealth is greater than 90% of US households, how do you define "regular folks"?

Seriously, it seems incongruous to refer to those in the top 10% as "regular folks". I suspect there might more than a few TMF subscribers in the top 1% of US households in terms of net worth.
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When one's household wealth is greater than 90% of US households, how do you define "regular folks"?

Seriously, it seems incongruous to refer to those in the top 10% as "regular folks". I suspect there might more than a few TMF subscribers in the top 1% of US households in terms of net worth.


The top 10% comprise a group of over 30 million. Think about that. Even the top one percent in the US are a group of over three million. They are hardly rare or unusual. Many are indeed regular folk, living in double wides and wearing old clothes. I have prepared taxes for several.

When you get to the truly wealthy, like the 400 top earners that the IRS tracks every year, you are looking at a bit over one ten thousandth of a percent. They are the one in a million group, who love to get you all riled up about the one in a hundred group. I think we should start at the top. If raising taxes on the richest 400 doesn't generate enough, go to the richest 4,000. If that is not enough, go to the richest 40,000, and then the richest 400,000. You still won't get to the majority of those merely in the 1%.

You certainly can grow up poor and get to the 1% with the practices promoted on these pages. If your definition of "regular folk" means those with more money in their Starbucks account than in their savings account, I see your point. But with some discipline, and an absence of too much bad luck, most of them could move to the top 10%, if not beyond. You might even be surprised to find yourself there. Happy investing, stay Motley like the rest of us regular folk.
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You certainly can grow up poor and get to the 1% with the practices promoted on these pages.

Habit, compounded over time, is everything.
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You do not need to withdraw your capital gains, you just need to realize them.
There is a very important difference.
I try to not realize gains during the year so in december I can realize just enough long term capital gains to get my AGI around 105k and I BUY THE STOCK BACK RIGHT AWAY. The cost basis gets adjusted and the gains now are accounted for and paid at 0%. It is easier this way, because if you end up the year with realized gains you have to realize losses and make sure you don't wash the sales.
BTW I use the calculator at https://www.ameriprise.com/financial-news-research/financial... to estimate my tax liability.

Cheers,
Juan@Austin
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jmacosta - can you expand upon that a little? I think that is what we are trying to do. We had intended to sell some of our stocks (long term stock) every year at the end of December, so we would know our AGI for the year. I don't understand your statement about buying the stock back right away... can you explain that to me? Maybe that is not going to work in our scenario.

We are retirees with only social security income and a reasonably large stock portfolio. Of course, the SS isn't enough for us to live on, so we were going to sell stocks at the end of the year to get up to around $100,000-$120,000 of income (including the SS income), for the NEXT year. I guess I would not be buying back the stocks then... right?

Thanks for any further explanations...

Footsox
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Hi Footsox,

*DISCLAIMER* I am telling my story, I am no tax expert, in fact, I have only made three tax returns in USA and only the last one included stock (The first two were many years ago when I worked here). But I have read a lot about this issue as I moved back last year to the US and there are a lot of tax issues when you bring your portfolio from abroad. So I have talked to several experts and hired two accountants to handle the import of my assets. BTW I am also retired but I have no SS income, so I live exclusively out of my portfolio. I do not have an IRA, just a regular taxable account.

I learned that here you only pay taxes on realized gains (it is different in my country), so if you sell stock at $100 that you bought at $80 you realize gains of $20 although you have $100 in your hand. So there is a big difference between the money you need to live and the tax liability on your sale.

This is how it works for me (At least so far):
Before year end I estimate my tax liability (AGI) from my november broker reports, then I calculate which positions and how much I need to sell to realize enough long term capital gains to increase that AGI to 105k which is my no-tax cap. I then end up with a lot of cash that I don't need, so I buy back the same stock. For an example, lets say I bought SBUX stock at $17 many years ago, so I sell it now for $117 realizing a gain of $100. Lets say I need to realize $50k to reach my cap, so I sell 500 shares. I end up with $58,500 I then buy back the same 500 shares for about $117. I end up with 500 shares but now the cost basis is $117 and I need to wait one year before selling it again. Now I have exactly the same portfolio, and $50k tax free.

This has nothing to do with how much money I need to live. For living expenses I NEVER sell stock. I have a portfolio margin account and what I do is borrow against margin. I keep my stock growing and paying dividends, I pay a minuscule rate (around 1.5%) on the loan and I do not have to repay the capital EVER. When I get dividends and interests they are swallowed by the debt, but it is irrelevant, I always have my margin available when I need to withdraw money or make a trade.

Hope it is clearer now,
Juan@Austin
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Hi jmacosta, Thanks for the explanation. I truly appreciate it. Some of the things you do are very creative. We are a little odd, in that we don't have a big retirement check coming in every month, so we are trying to think of some different ways to sell off some of our stocks every year and not get socked with income taxes. It is very interesting to read how you are doing some of it. And using the 1.5% when you need living expenses is very interesting. Good to know we have some alternatives we could use. Thanks again. I appreciate it.

Footsox
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Hi again jmacosta, Just thinking about the 1.5% loan you get from your brokerage. Maybe you can do some math along with me... Let's say you "borrow" $100,000 at the 1.5% rate. You then take it out as cash and spend it. So, now your brokerage takes money out of your account for the "payments" monthly or something? So, that 1.5% is then $1500 per year interest on the $100,000, right? I am wondering about the mechanics on how the payments (or the $1500) get paid to the brokerage... And by the way, who is your brokerage. I think mine (Etrade) has 2.5%.... You have a good deal. :-)

Also, once you agree to the loan, are you locked in at the 1.5% rate for the life of the loan? Or is it variable. Thanks for any additional info. I much appreciate it!

Footsox
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Hi Footsox,

Let me go over your concerns one by one:

Just thinking about the 1.5%
Exact rates are variable.
Here https://www.interactivebrokers.com/en/index.php?f=44427 you can see that now they start at 1.59% and go DOWN to 0.75% as you owe more and more money.

your brokerage
Interactive Broker

Maybe you can do some math along with me... Let's say you "borrow" $100,000 at the 1.5% rate. You then take it out as cash and spend it.
As my account is Portfolio Margin, it means that I have a line of credit backed by my portfolio value. So I just make a regular withdrawal from my account. If there is cash it takes it from cash, If there isn't any, it just increases my margin loan. I can then do whatever I want with that money. I tend to think of the loan balance as a short dollar position.

So, now your brokerage takes money out of your account for the "payments" monthly or something?
No, there is no commitment to repay as long as you have enough collateral.
If my portfolio crashes and I run out of collateral, then they will liquidate my account (margin call) to cover the loan. But in my case it would mean a 70% drop on S&P500 and me sleeping through it, not likely.

So, that 1.5% is then $1500 per year interest on the $100,000, right?
Interest is calculated on a daily basis and added to my margin loan balance.

I am wondering about the mechanics on how the payments (or the $1500) get paid to the brokerage
Margin loans are not like bank loans, there is no commitment or installments, it just grows against your collateral. And yes, you pay interest on interest.
Of course, at any point you can sell stock to repay the loan or deposit funds, but there is no obligation or due dates.
But normally the growth/dividends of my stock is a lot more than the interest. I just keep my leverage under control.

You have a good deal.
I used to be afraid of moving to a new broker, but first my broker "Datek" was bought by Ameritrade, then Ameritrade expelled me when my country declared currency control, so I had to move, and I tell you I am really happy that I did. I have saved a bundle on commissions and IB is really flexible with margin. Right now I do not get free trades like it is common nowdays (although I could), but I get real market prices because they don't sell my flow.

Also, once you agree to the loan
There is no application or approval of a loan, my account is like a credit card with a huge credit limit and 0 minimum payment. Each month I take whatever I need.

are you locked in at the 1.5% rate for the life of the loan? Or is it variable.
It changes everyday, but I never pay much attention, it is always very low. I check it every year and if it ever goes uncomfortably high, I can always liquidate some assets to cover the margin.

Enjoy
Juan@Austin
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We have actually thought of using our brokerage loan money to by a vacation home. We could sell stocks and buy a vacation home with cash, but that didn't seem logical, because I can typically make more with stocks than I can with owning real estate in a 12 month period. Our normal residence is paid off, so no mortgage. But, whenever we have applied for a mortgage, we get really sick and tired of supplying lots of endless paperwork. And most mortgage companies want to see monthly income, and our appears low to them. Our credit score is nearly perfect, so is just very irritating... So, we have thought about using brokerage loan money for a vacation home, and then probably paying off that in 2-3 years.

Great to hear some creative ideas. Thanks jmacosta!

Footsox


I am also thinking on buying a house (although this may be a thread on its own) and found that banks do not like me not having a W2. But if you show consistent capital gains (as per our previous discussion) for two or three years, they will show as AGI in your 1040, so they may take it. BUT, the big BUT, can you get 1.06% interest rate on a mortgage? and with no closing cost? no mortgage insurance either.
For me it is a lot cheaper (less than half) to borrow from margin and pay cash than to take a mortgage.
You could, if you want, after buying cash (with margin loan) take a special mortgage against the home equity. It is called home equity loan, but it is expensive (6%). You can also get an asset depletion loan, which is a loan against your stock portfolio, but it is also very expensive.

I've lived out of margin for 6 years now and my portfolio NLV keeps growing even while I paid three college tuitions (two still going).
Yes you need discipline, sometimes my portfolio has grown to twice its NLV, and the temptation of over-leverage is always there.

Best regards,
Juan@Austin
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You could, if you want, after buying cash (with margin loan) take a special mortgage against the home equity.

Actually, within 90 days after buying with cash, you can get a mortgage that's considered an acquisition mortgage, not an equity mortgage. It will cost more than the current rate on your margin loan, but it will not be as expensive as an equity loan, and you can get a fixed rate, so if rates do take off, you won't be stuck paying variable margin rates.

You can also get a loan that's based on your assets, rather than your income.

I would suggest that if you are serious about buying a home that you talk to a good mortgage broker.

AJ
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We have actually thought of using our brokerage loan money to by a vacation home

Have you considered a loan that is has a lower loan to value than the standard 80%? They are often easier to obtain.
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