Tax Strategy For 2008-2010 Capital Gain


N

njoracle

I'm retired for many years and ordinarily my taxable income (from
pension, SS, dividends and capital gains) runs around $60,000. I have
two questions:

1. So far this year I will have sold stock with a capital gain of about
$25,000. My understanding is that, with that capital gain, my taxable
income will be about $85,000 BUT because I will still be in the 15%
bracket, I will owe no tax on the $25,000 capital gain. If I sell more
stock with e.g. a capital gain of $5000, I will owe 15% tax on the
additional $5000.

Is that essentially correct?

2. I have some stocks which are considered to be Master Limited
Partnerships. The distributions are considered to be Return of Capital
and are not included in any income calculations for tax purposes but do
reduce the cost basis of the stock. If I sell these MLP's, I will incur
substantial capital gains because of the reduced cost basis.

What I would like to do in 2009 and 2010 is to sell the MLP's and then
buy them back immediately. This will allow me to reset the cost basis to
a much higher amount then it currently is without having to pay any
additional tax as long as taxable income is still under $85,000. I
assume there are no "wash" sale rules for selling at a profit and buying
back immediately.

Do you see any problems with this strategy?

My original plan was to hold these MLP's forever and have them go to my
estate with a new step-up to market value cost basis at the time of my
death. However, there has been talk of eliminating the step-up process
in some of the new tax legislation being discussed so I'm considering
using the above approach as a hedge against any change in the tax laws.
 
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P

Phil Marti

njoracle said:
I'm retired for many years and ordinarily my taxable income (from pension,
SS, dividends and capital gains) runs around $60,000. I have two
questions:

1. So far this year I will have sold stock with a capital gain of about
$25,000. My understanding is that, with that capital gain, my taxable
income will be about $85,000 BUT because I will still be in the 15%
bracket, I will owe no tax on the $25,000 capital gain. If I sell more
stock with e.g. a capital gain of $5000, I will owe 15% tax on the
additional $5000.

Is that essentially correct?
No. The top of the 2008 bracket for married, filing jointly is $65,100.
Only the amount of the gain that takes you to that figure will go untaxed.
2. I have some stocks which are considered to be Master Limited
Partnerships. The distributions are considered to be Return of Capital and
are not included in any income calculations for tax purposes but do reduce
the cost basis of the stock. If I sell these MLP's, I will incur
substantial capital gains because of the reduced cost basis.

What I would like to do in 2009 and 2010 is to sell the MLP's and then buy
them back immediately. This will allow me to reset the cost basis to a
much higher amount then it currently is without having to pay any
additional tax as long as taxable income is still under $85,000. I assume
there are no "wash" sale rules for selling at a profit and buying back
immediately.

Do you see any problems with this strategy?
I don't know where you got that $85,000 number. We don't know the top of
the 2009 15% bracket yet, but it won't be anywhere near that.

A light just went off. Are you talking about Adjusted Gross Income rather
than Taxable Income? For a couple both over 65 and taking the standard
deduction, the top of the 2008 15% bracket would equate to $85,100 in AGI
(Taxable Income of $65,100).

As far as your MLP is concerned, the only snag I see is the possibility that
your action might turn some current distribution into ordinary income.
Other than that the basic concept of selling for a gain and rebuying is
fine. Remember that the long-term holding period is a year and a day.
My original plan was to hold these MLP's forever and have them go to my
estate with a new step-up to market value cost basis at the time of my
death. However, there has been talk of eliminating the step-up process in
some of the new tax legislation being discussed so I'm considering using
the above approach as a hedge against any change in the tax laws.
I find it more entertaining so see how big dust bunnies can grow than to
worry about what income tax laws will be after I'm dead, but to each his
own. Do keep an eye out while you're alive, though, because there will
definitely be changes of some sort by 2010.
 
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N

njoracle

Phil said:
"njoracle" wrote:
A light just went off. Are you talking about Adjusted Gross Income rather
than Taxable Income? For a couple both over 65 and taking the standard
deduction, the top of the 2008 15% bracket would equate to $85,100 in AGI
(Taxable Income of $65,100).
Thanks for picking that up. I meant Taxable Income but used the AGI by
mistake. TI is about $45,000 so a capital gain of $25,000 would get me
to $70,000 and I would owe 15% on the $5000 over 65,100.
As far as your MLP is concerned, the only snag I see is the possibility that
your action might turn some current distribution into ordinary income.
I'll have to look into that
Other than that the basic concept of selling for a gain and rebuying is
fine. Remember that the long-term holding period is a year and a day.


I find it more entertaining so see how big dust bunnies can grow than to
worry about what income tax laws will be after I'm dead, but to each his
own. Do keep an eye out while you're alive, though, because there will
definitely be changes of some sort by 2010.
And perhaps some big "changes" will come in 2009. ;)
 

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