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Old 03-17-2016, 05:20 PM
 
148 posts, read 103,746 times
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Quote:
Originally Posted by TwoByFour View Post
"Hypothetical" is the key here. Very few, if any, equity mutual funds will have no dividends. The average dividend across all US equities is currently about 1.7%. You will pay tax on those whether they are reinvested or are spent as income. Tax rate on qualified dividends is the same as LTCG. Tax rate on ordinary dividends is whatever your tax bracket is.

So, to answer your question you need to get specific and pick the mutual funds you will invest in.

I'm just trying to get ball park figures, and these posts have been every helpful, thanks.

I just didn't know how/if mutual stocks factored into LTCG. When all is said and done, it's going to be about the best performing investment (post tax) for a given level of risk. Even if that mean paying some income tax.
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Old 03-17-2016, 05:41 PM
 
148 posts, read 103,746 times
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Quote:
Originally Posted by mathjak107 View Post
if you can stay in the 15% tax bracket including what you sell then there could be zero long term capital gains taxes due
So if I understand correctly, if our investment income is less than $73,800 (married, filing jointly), we pay 0% tax on the portion that comes from LTCG's.

That could be useful, as we could live off that most years and take out more every 4-5 years to pay for big expenses, like cars/rv/motobikes/house renovations/travel etc etc.

In other words, we pay very little tax most years, but pay the maximum every 4 or 5 years. Which would average out in our favor.
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Old 03-17-2016, 05:52 PM
 
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Your total taxable including investment income and any capital gains distributions have to stay within the 15% bracket. At the end of the day everything together has to remain under 73800.00 including social security
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Old 03-17-2016, 05:57 PM
 
148 posts, read 103,746 times
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Quote:
Originally Posted by chet everett View Post
I have personally MANY otherwise savvy people end up with HUGE tax liabilities from misunderstanding how the "dividend distibutions" work on their portfolio of investments. There are some funds that are managed for tax efficiency that have occiasional "rebalancing" events that still result in TERRIBLE tax bills.

The OP is asking the right question, about net returns after taxes, but the asnswer is NOT easy nor is it cast in stone -- every year all kind of decisions can change the tax picture. Some firms that previously did not pay out much dividends might have an accounting event or even merger that results in huge increase in their dividend. That might translate into a mutual fund that holds shares in that firm scrambling to rebalance their holding for tax efficiency. The various changes that the Congress works out for the IRS can mean that once low tax investments now have different implications...

If the OP is really worrried about trying to live off $4M in invested funds while the ride around in an RV that is a silly question, because unless they are spending tens of thousands per week they won't outlive their money. OTOH if they really do want to set aside an appropriate sum on a regular basis for annual income taxes they will soon learn that relying on an investments to be taxed the same way year in and year out is impossible. The smartest advisors that I have worked with try to get their clients to understand that variablity above a baseline is a prudent way to plan for expenditures and investment draw down. That means that whatever accounts you use to pay bills (including tax liability...) will have a range that includes a baseline and then some ammount that will vary. If your total expenditures are not met by the baseline you need to dial back your lifestyle and/or shift your spending so only the amount above the baseline is your "splurge", otherwise when annual payments are actually due you will dip into principal and THAT starts a spiral of asset depletion that often does result in folks ending up destitute. For older retirees the splurge is often something like treating the extended family to a shared vacation of some other frivolous thing. Funny thing too is more of the families that I know that have been "treated" to such a thing often complain that it was more of a hassle to get kids out of school or miss scheduled sports events. Being a millionaire is truly a burden even for extended family of such a generous person...
Thanks, that is a very good post and I figured it would be like that (bold text). We get that investing is not like a regular pay check. We can be very flexible with our spending. We never lease anything and, other than our mortgages and internet/phones, we don't have any reoccurring expenses. This is shaping up to be a five year plan and our mortgage should be paid off by then anyway.

Living in an RV can be done cheaply, but we would still like to keep our house (expensive maintenance, but reasonable property tax). Then there's the RV itself and the garage full of motor bikes we want to bring with us. Not to mention our kids will be with us for a while. We'll be home schooling them, though.
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Old 03-17-2016, 06:36 PM
 
148 posts, read 103,746 times
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Quote:
Originally Posted by Robyn55 View Post
Is this a hypothetical $1 million? If it isn't hypothetical - then you should have some idea what investments you're comfortable with - and what you've been earning on them. Both before and after tax. Robyn
We've primarily invested in real-estate up till now. The rest of the money will be coming from NSO's and savings.

The stock market is uncharted waters to us. Having our property's appreciate while someone else pays the mortgage has been great, but it's hard to ignore the potential tax benefits of the stock market.
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Old 03-17-2016, 07:10 PM
 
148 posts, read 103,746 times
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Quote:
Originally Posted by mathjak107 View Post
Your total taxable including investment income and any capital gains distributions have to stay within the 15% bracket. At the end of the day everything together has to remain under 73800.00 including social security
Got, it. Poor wording on my part.
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Old 03-18-2016, 12:12 AM
 
Location: Haiku
7,132 posts, read 4,733,005 times
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The 15% bracket is determined only by ordinary income, not by LTCG and QD. So your taxable income (on line 43 of the 1040 form) can be greater than 73,800 and you can still be in the 15% bracket. The key is that only the amount of LTCG that keeps your taxable income less than 73,800 will be taxed at 0%.

For example, if the following is the situation:
Ordinary income = 50k
LTCG = 50k
Taxable income = 100k

Your tax bracket will be 15%, and the first 23,800 of LTCG will be taxed at 0%, but the remaining 26,200 will be taxed at 15%.
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Old 03-18-2016, 04:26 AM
 
105,811 posts, read 107,799,717 times
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think of it as a bucket:

all other income goes in the bucket first and starts to fills up the 15% bracket before the long term capital gains money can go in .

whatever room is left can be used to apply to the capital gains money .

so if you have 50k in other income all you can apply to zero capital gains is the remaining 23k or so . the rest gets taxed at 15 or 20% depending on income level .

if you hit the 20% level it jumps to 24% because there is a 4% medicare surcharge as well as potential amt tax penalty .

good explanation from kitces here :



https://www.kitces.com/blog/understa...p-up-in-basis/
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Old 03-18-2016, 08:03 PM
 
148 posts, read 103,746 times
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Thanks for the clarification. It's been a long time since I did my own tax.

It looks like you have to be 59.5 years old before you can draw anything from your 401k without penalty, so the returns from the stock market would be 100% of our income (assuming we sold our investment properties).

So if we pay 0% tax on LTCG for the first $75,300 (less ordinary income from the mutual funds) and then 15% on $75,300 to $466,950.

The ordinary income from the mutual fund will be taxed at 0% for the first $18,550 and then 15% the remainder between $18,550 to $75,300.

And that's just federal income tax. State/sales/property tax is also a factor.

That seems pretty reasonable compared to paying income tax.

You only pay LTCG tax when you sell, right?
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Old 03-18-2016, 09:15 PM
 
Location: Haiku
7,132 posts, read 4,733,005 times
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Quote:
Originally Posted by Mr Blank View Post
You only pay LTCG tax when you sell, right?
Correct.
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