Capital Gains and Losses

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His wife are in the 33% bracket but only just. They wish to…

Charles and his wife are...
Charles and his wife are in the 33% bracket but only just. They wish to move to a lower bracket for both ordinary income and capital gains but only if doing so would increase aftertax income. Thus they are looking at HSA, charitable contributions, and especially moving away from dividend-paying stocks and taxable bonds. Does this sound like a reasonable goal assuming the numbers pan out? One concern: lower total returns and higher investment risk of low- or no- dividend paying stocks. Thank you.
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11/14/2017
emc011075
emc011075, Master Tax Adviser
Category: Capital Gains and Losses
Satisfied Customers: 3,864
Experience: Master Tax Adviser and Enrolled Agent
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HI. My name is ***** ***** I will be happy to help you.

Contributions to HSA, IRA or charitable contributions will not increase their after tax income. A $1000 contribution to HSA in 28% tax bracket will generate $280 refund. They will have to pay 1K upfront to get back $280. The same would apply to charitable contributions (if not already capped by AMT). The only benefit of making contributions is to lower your taxable income so part of your income is taxed at lower tax rate.

Regarding the capital gains, it will still be same, in 33% tax bracket or 28%. Anything that pays dividends is basically free money and 15% tax rate is a steal. It would be smarter to reduce ordinary income and increase capital gains and dividends.

For instance, in 28% tax bracket your retirement distribution is taxed at 28%, but your capital gains are still taxed at 15%.

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Customer reply replied 8 months ago
Thank you. Are you referring to 'qualified' dividends or all dividends?

qualified dividends and long term capital gains. These are taxed at 15%. Nonqualified dividends and short term capital gains are taxed as ordinary income.

Your goal should be to increase income taxed at lower rate and reduce income taxed at higher rate. You want to avoid selling any property that had been depreciated (business property) or short term gains.

Extra refunds are generally from credit, especially from refundable credits like additional child tax credit and earned income credit. Unfortunately somebody in 33% cannot claim most of the credits because the credits are limited by AGI.

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Customer reply replied 8 months ago
Eva, I can't rate or tip you because the stars and button top right are grayed out!

Let me check. Is there anything else I can help you with today?

emc011075
emc011075, Master Tax Adviser
Category: Capital Gains and Losses
Satisfied Customers: 3,864
Experience: Master Tax Adviser and Enrolled Agent
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