Tax Puzzle

[moda0306]

yep , i can be the poster child for that . i delayed 1 extra year and got hammered

Had you engaged in enough loss-harvesting to have a sizable loss-carryover?

If so, it should have eaten up a good chunk of your gain. If not, it would appear your problem wasn't loss-harvesting, but refusing to harvest gains in modest chunks approaching a large cash-need and then doing it all at once.

I probably should've been clear that just because I advocate loss-harvesting doesn't mean you ignore sizable unrealized gains. You almost never want to blindly put yourself in any position where your AGI will rise significantly for one year. Is there something that caused you to have to liquidate such a large position?

Loss harvesting doesn't work all that well if you actually need to liquidate the gains shortly thereafter (especially since it's limited to $3,000 per year), but even then, you not only gain the timing element, but you harvest the loss as an ordinary loss, but usually recognize a long-term capital gain... so even with a strong hike in cap gain rates, one would often benefit from the arbitrage, depending on their ordinary tax rate. But that's only if it's a small loss compared to small gains. If you have a small loss next to BIG gains, along with a democrat pushing tax hikes, then gain harvesting can become more important than loss harvesting (esp if you'll need that money soon).

Also, low ordinary brackets can be harvested in a number of ways, one of which is doing sizable Roth conversions. This will also have the affect of lowering RMD's later in retirement, so I usually recommend using that as the main mechanism to "harvest" low brackets.

This all probably makes no sense to y'all or I'm missing some key aspect.

it was a real estate holding that had the gains . it had to be sold all at once and it had no offsetting loses since it was a few hundred k . our senior partner gets to decide when it is sold not me .

Oh ok... so it sounds like it was sort of out of your hands anyway? Rather than "waiting too long" (although I see what you're trying to say)?

My other question... would you have had the ability through reduction in other sources of passive income (mainly, distributions from IRA's), to lower your other income to keep your AGI smoother than year? Or were you pretty much stuck realizing the taxable income that year that you were?

Big bumps in AGI suck. :/ Unfortunately, that makes "fixed taxable income that I don't need right now" also kind of suck when you have a huge capital gain that is all going to be recognized in one year. But you know that by now I suppose!

[moda0306]

michael kitces wrote an excellent article on tax loss harvesting .

Executive Summary
Capital loss harvesting has long been a staple of investment tax strategy – so much that the Internal Revenue Code has special “wash sale” rules to ensure that the technique is not overly abused. Fortunately, though, the wash sale rules can be navigated effectively, allowing taxpayers some means to take advantage of available tax losses.
However, while tax loss harvesting remains a viable strategy, it is often greatly overvalued, as the true benefit is not the tax savings from harvesting a loss but merely the benefit of deferring those gains. In the meantime, the strategy has a non-trivial exposure to several risks, including the potential for the alternative investment held during the 30-day wash rule period underperforming the original investment, the possibility of negative tax arbitrage if the investment rebounds in the near term, and the danger that harvesting losses too effectively over time will drive the client’s future capital gains into a higher tax bracket! In addition, the fact remains that capital loss harvesting produces no benefits for clients who are eligible for 0% capital gains tax rates, and in fact potentially harms them; in such scenarios, clients should actually be harvesting gains, not losses!
Ultimately, this doesn’t mean that harvesting capital losses is a bad strategy, but it is a strategy where the risks must be carefully considered, as they can easily outweigh the relatively modest benefits!

https://www.kitces.com/blog/is-capital- ... vervalued/

Kitces is the man. Loss harvesting in the context of "I need some money where do I take it from" within a $3,000-$6,000 loss scenario I think makes pretty quick/easy sense.

Loss harvesting in the context of selling for sizable carried-over losses when you don't need the cash is definitely questionable, but probably more from an investment standpoint than a tax standpoint (as the losses will either get eaten up by future gains or ordinary loss carryover).

I do like the idea of using capital losses to offset collectibles gains, though. I think that would be an ok move if you can amend your portfolio balance elsewhere without upsetting the wash-sale rule.

The topic I find more interesting is when you're approaching older-ages, do you "spend down" capital gain brokerage assets or defer and spend-down Traditional/Roth assets. When considering the basis-step-up at death, it makes it an interesting dilemma.

[mathjak107]

well if you will be delaying social security hitting any traditional retirement accounts first has plenty of plus's .
the tax gods give us the ability to draw out money from these accounts at zero taxes if we plan right .

just the standard deduction and exemptions can allow 22k of untaxed ira money to be taken out tax free for 8 years . that is 176k of tax free money while delaying ss .

you can pull out up to 40k and pay about 4.50% . that is also a great benefit . 320k spent down and not subject to rmd's can be nice .keep in mind a spouse can be hit with heavy rmd's if one dies and now has to file single .

throw in selling some equities in the tax free zero percent capital gains bracket , some roth income and some cash and you can see 100k plus income while delaying and paying very little tax .

it makes it more difficult to pull off if delaying ss is not one of your strategy's .

[moda0306]

well if you will be delaying social security hitting any traditional retirement accounts first has plenty of plus's .
the tax gods give us the ability to draw out money from these accounts at zero taxes if we plan right .

just the standard deduction and exemptions can allow 22k of untaxed ira money to be taken out tax free for 8 years . that is 176k of tax free money while delaying ss .

you can pull out up to 40k and pay about 4.50% . that is also a great benefit . 320k spent down and not subject to rmd's can be nice .keep in mind a spouse can be hit with heavy rmd's if one dies and now has to file single .

throw in selling some equities in the tax free zero percent capital gains bracket , some roth income and some cash and you can see 100k plus income while delaying and paying very little tax .

it makes it more difficult to pull off if delaying ss is not one of your strategy's .

Yeah delaying SS allows you to firmly plant your balance sheet the way you want for tax purposes with minimal tax effect if you have a healthy net worth. Of course, all these conversations tend to ignore (for some reason) what people need to live on. People like to talk about their net worth as if there's not some needy fleshling syphening $50k-$100k off of it.

If someone needs $100k per year at retirement, there's probably no way around paying a healthy amount of taxes. The piper has to be paid at that level of lifestyle. But if you can live happily off of $40k, now you're talking. You can really swing some sweet arbitrage action (not to mention the little fact that you need $1.5 Million less in net worth to produce income at that level).

[mathjak107]

most americans do not have enough in assets to safely delay social security if they retire earlier . they would spend down to much .

but those who will have rmd tax issues will likely be better candidates since those issues tend to go with bigger balances . for most it would make little sense to delay ss unless they could take their full draw day 1. then when ss kkicks in the composition changes to 70% less your money making up the amount and more ss .

waiting until 70 to spend your first additional dollar has little logic to it so delaying is really going to be about being more market and rate dependent early on for your income and more ss dependent later but the amount stays the same and is just inflation adjusted.

we could have had over 100k income with little taxes if i had put better building blocks in place earlier on . who knew ??

40k at 4.50% tax , lots of zero percent capital gains sales , roth income , over funding whole life policies with idle money , getting 4% with no fees or commisions , borrow it back tax free with compounding and you can easily see over 100k while delaying.

plus that would have got you a subsidy towards an aca plan from 62 to 65 .

[moda0306]

most americans do not have enough in assets to safely delay social security if they retire earlier . they would spend down to much .

but those who will have rmd tax issues will likely be better candidates since those issues tend to go with bigger balances . for most it would make little sense to delay ss unless they could take their full draw day 1. then when ss kkicks in the composition changes to 70% less your money making up the amount and more ss .

waiting until 70 to spend your first additional dollar has little logic to it so delaying is really going to be about being more market and rate dependent early on for your income and more ss dependent later but the amount stays the same and is just inflation adjusted.

we could have had over 100k income with little taxes if i had put better building blocks in place earlier on . who knew ??

40k at 4.50% tax , lots of zero percent capital gains sales , roth income , over funding whole life policies with idle money , getting 4% with no fees or commisions , borrow it back tax free with compounding and you can easily see over 100k while delaying.

plus that would have got you a subsidy towards an aca plan from 62 to 65 .

Your other examples came at the cost of the taxes in the years the money was earned. That's why I said "the piper has to be paid." Of course any billionnaire could take all his post-tax net-worth and put it in munis to pay no tax. But he sure as hell had to pay tax to become a billionnaire. That was my point.

[mathjak107]

muni income is taxable as far as getting ss taxed , it is added back in to your magi

[moda0306]

muni income is taxable as far as getting ss taxed , it is added back in to your magi

Ah dangint man you got me... I was just giving a flippant example... replace that with an over-funded life policy.

[WiseOne]

Sounds like selling gold and maybe some bonds are your best bet. I wouldn't worry about the $3K limit, because you'll be able to use any excess next year. I assume the new tax deductions you'll enjoy in 2018 won't drop your tax bracket all the way down to 15%.

It depends on how nervous you are about lightening your gold holdings. They'd become a key asset if the stock market were to crash later this year. That's a fairly unlikely scenario though, and as you say you'll likely be just fine re-buying after January 1. You could even take the opportunity to swap ETF shares for physical gold - for which wash sale rules don't apply.

Also, I once successfully tax loss harvested physical gold. It netted me a bit of free money but mainly I wanted to know how hard it would be. It was not at all. It involved one phone call to APMEX, one trip to the post office to send the registered package, waiting for the return package, and saving the sale & purchase documents. And the call to APMEX was almost painless - they knew immediately what I was doing and said they had lots of customers doing the same.

[mathjak107]

muni income is taxable as far as getting ss taxed , it is added back in to your magi

Ah dangint man you got me... I was just giving a flippant example... replace that with an over-funded life policy.

i hate that report post thing . i just reported that post instead of editing .

anyway you have to be careful over funding . if you go one dollar over what you are allowed to over fund the life policy becomes reclassified a modified endowment policy and the whole thing loses its tax exempt status .

see how much there is to know for retirement ? there so much we are not aware of until it is to late to fix anything

[farjean2]

most americans do not have enough in assets to safely delay social security if they retire earlier . they would spend down to much .

but those who will have rmd tax issues will likely be better candidates since those issues tend to go with bigger balances . for most it would make little sense to delay ss unless they could take their full draw day 1. then when ss kkicks in the composition changes to 70% less your money making up the amount and more ss .

waiting until 70 to spend your first additional dollar has little logic to it so delaying is really going to be about being more market and rate dependent early on for your income and more ss dependent later but the amount stays the same and is just inflation adjusted.

we could have had over 100k income with little taxes if i had put better building blocks in place earlier on . who knew ??

40k at 4.50% tax , lots of zero percent capital gains sales , roth income , over funding whole life policies with idle money , getting 4% with no fees or commisions , borrow it back tax free with compounding and you can easily see over 100k while delaying.

plus that would have got you a subsidy towards an aca plan from 62 to 65 .

I have a wife that's 17 years younger than me (I'm 68), and with her working we still have a slight positive cash flow in the normal monthly budget. So I'm hard-pressed to see how delaying SS to get the maximum amount isn't a no-brainer for us.

The one thing I think about is the double whammy coming in two years when I start taking both SS and RMD's from my 401k in the same year. AGI will be going up significantly at that time. That's a problem most people would probably like to have but I wonder if there if there is anything I can do to minimize the taxes. Already maxing out my wife's 401k so there is nothing to be gained there. She could retire too but she doesn't want to right now. Maybe she will change her mind in a couple of years.

[Xan]

The one thing I think about is the double whammy coming in two years when I start taking both SS and RMD's from my 401k in the same year. AGI will be going up significantly at that time. That's a problem most people would probably like to have but I wonder if there if there is anything I can do to minimize the taxes. Already maxing out my wife's 401k so there is nothing to be gained there. She could retire too but she doesn't want to right now. Maybe she will change her mind in a couple of years.

Would it make sense to start taking distributions now to reduce your RMD? With only two years to go it may be too late.

[mathjak107]

if you cross the income brackets in medicare the increase in premiums can be a lot . they actually have a new lower threshold going in to place in 2018 where you get bumped up .

the thresholds are pretty high but remember all it takes is an asset sale that produces a high gain and you are there. typically this is more a problem with real estate sales since you can't sell off the living room along the way .

all medicare premiums are based on 2 years prior all the time .

remember too , with rmd's if your wife is more than 10 years younger it is a different table that is followed

[mathjak107]

I have a wife that's 17 years younger than me (I'm 68), and with her working we still have a slight positive cash flow in the normal monthly budget. So I'm hard-pressed to see how delaying SS to get the maximum amount isn't a no-brainer for us.
.

delaying is always a mixed bag unique to each of us .

i delayed until this month when i turned 65 . for each year i don't take ss my wife does not get her spousal adder which was almost 4k a year
so the cost of delaying was not only the invested assets we spent down the last 3 years , the checks we did not collect but also 4k a year in spousal .

i do some consulting work 1 day a week when we are not traveling so i would have given some back if i filed earlier . the year i turn fra which is next october i can earn up to 45k so it was a good balance to file now for us .

don't forget by not collecting you are not covered under hold harmless under medicare either and there is no cap on what your normal premiums can jump to as well , so there are lots of factors that have to be looked at when delaying , especially as a couple ..

there are tax ramifications as well with the bigger ss check kicking in with rmds to look at too . so merely delaying does not always give you the best balance of things .

filing early makes you much more dependent on markets if you live off your portfolio. filing later gets you a 70% bigger check so you are less dependent on markets but more dependent on longevity . we went around the middle at 65

[mathjak107]

if you cross the income brackets in medicare the increase in premiums can be a lot . they actually have a new lower threshold going in to place in 2018 where you get bumped up .

the thresholds are pretty high but remember all it takes is an asset sale that produces a high gain and you are there. typically this is more a problem with real estate sales since you can't sell off the living room along the way .

all medicare premiums are based on 2 years prior all the time .

remember too , with rmd's if your wife is more than 10 years younger it is a different table that is followed

You might be able to structure the deal as an installment sale, receiving the proceeds, and thus gain, over a period of tax years. Check with your accountant.

damn , i got to stop hitting the report button .

anyway what i said is i doubt i would ever consider an installment sale on real estate at retirement . last thing i would ever want is a chance of default and then me having to deal with it all over again .

as far as the medicare jumps , if you have a large sale like we did before actually retiring you can try to appeal the jump in premium .

we did and won . we had a great examiner who really tried to help us .

because the year of the sale the gain was so large and we were still working , we hit almost 500k in taxable income .

the following year we retired . the examiner said because we went from 500k to under 100k in taxable income and we were still working back then she could grant an appeal on the fact it was a life changing event.

luckily we had just done our 2015 taxes so we could show them and instead of using 2014 which was that crazy year they allowed us to use 2015 instead .