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I read #6 with particular interest, because---for once--- it specifically applies to me and wifey. (Except that it doesn't apply to Trad. IRA accounts. I can't find any reference to cost-basis of shares held in my Trad. IRA accounts---> the lion's share of what we own.)
In short, my head is exploding. SELL (at a profit), in order to turn right around and repurchase those shares from the same mutual fund. Because doing so raises the cost-basis and therefore reduces the cap. gains tax bite when selling again, in the future. I can't argue. It's true and logical. But what sort of SPECIAL KIND OF WEIRD do you have to be, to have such a thought creep into your brain? ....This is a testament to the craziness of the Tax Code.
You can fine tune this strategy. Especially with large (and only vaguely estimated) dividends and cap gains distributions expected this year, it's difficult to get up to the 15% tax bracket top without going over. What one can do (assuming one has a traditional IRA) is make some Roth conversions as well. The amount doesn't matter, so long as it's enough to ensure you go over the 15% top. Then, when you have your final figures in hand, recharacterize (unconvert) enough to just bring you back to the 15% bracket. You have most of next year (until your return is due, including extensions).
Usually, it is better to use the 15% bracket to take gains (and qualified dividends) rather than do Roth conversions. That's because you save 15% with the gains (cap gains for income in the 15% bracket are taxed at 0%). But using that spare space in your 15% bracket for Roth conversions saves you only 10% (as opposed to doing those conversions in the next bracket - 25%). On the other hand, some states exempt some or all of your IRA distributions (including conversions), and so the total (fed plus state) might make it better to do the Roth conversions than recognize cap gains.
Here's another tactic. If you have a fund where the size of the distribution is expected to be higher per share than your gain per share (look at your highest cost long term shares), then it can be tax efficient to sell those shares right before the record date (so that you don't get taxed on the distributions), and buy the shares back on the ex date. Since the gain you recognize (on the sale) is less than the distribution, you pay less in taxes now (though more later).
If you think the tax code is weird, consider that converting one dollar too much costs you 30c (30%) in extra fed taxes, not 25%. For example, if you're filing as a couple, the 15% bracket tops out at $72,500. Say you've got $2500 in cap gains, $70K in ordinary income (after deductions, exemptions, etc.). Add $1 of income. Your ordinary income is still under $72K, so that dollar gets taxed at 15% (15c). But you've now got $72,501 of total income, so $1 of cap gains is over the 15% bracket limit, and thus it gets taxed at 15% also. So you're paying 30c or 30% on that last dollar.
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Finally note that a side benefit of #6 (selling to recognize gains now in a lower bracket) affords you a tax-effective way to rebalance and/or select better funds in your taxable accounts.
Comments
In short, my head is exploding. SELL (at a profit), in order to turn right around and repurchase those shares from the same mutual fund. Because doing so raises the cost-basis and therefore reduces the cap. gains tax bite when selling again, in the future. I can't argue. It's true and logical. But what sort of SPECIAL KIND OF WEIRD do you have to be, to have such a thought creep into your brain? ....This is a testament to the craziness of the Tax Code.
You can fine tune this strategy. Especially with large (and only vaguely estimated) dividends and cap gains distributions expected this year, it's difficult to get up to the 15% tax bracket top without going over. What one can do (assuming one has a traditional IRA) is make some Roth conversions as well. The amount doesn't matter, so long as it's enough to ensure you go over the 15% top. Then, when you have your final figures in hand, recharacterize (unconvert) enough to just bring you back to the 15% bracket. You have most of next year (until your return is due, including extensions).
Usually, it is better to use the 15% bracket to take gains (and qualified dividends) rather than do Roth conversions. That's because you save 15% with the gains (cap gains for income in the 15% bracket are taxed at 0%). But using that spare space in your 15% bracket for Roth conversions saves you only 10% (as opposed to doing those conversions in the next bracket - 25%). On the other hand, some states exempt some or all of your IRA distributions (including conversions), and so the total (fed plus state) might make it better to do the Roth conversions than recognize cap gains.
Here's another tactic. If you have a fund where the size of the distribution is expected to be higher per share than your gain per share (look at your highest cost long term shares), then it can be tax efficient to sell those shares right before the record date (so that you don't get taxed on the distributions), and buy the shares back on the ex date. Since the gain you recognize (on the sale) is less than the distribution, you pay less in taxes now (though more later).
If you think the tax code is weird, consider that converting one dollar too much costs you 30c (30%) in extra fed taxes, not 25%. For example, if you're filing as a couple, the 15% bracket tops out at $72,500. Say you've got $2500 in cap gains, $70K in ordinary income (after deductions, exemptions, etc.). Add $1 of income. Your ordinary income is still under $72K, so that dollar gets taxed at 15% (15c). But you've now got $72,501 of total income, so $1 of cap gains is over the 15% bracket limit, and thus it gets taxed at 15% also. So you're paying 30c or 30% on that last dollar.
------
Finally note that a side benefit of #6 (selling to recognize gains now in a lower bracket) affords you a tax-effective way to rebalance and/or select better funds in your taxable accounts.