We didn’t cash in any stock or appreciated assets in 2021, which kept our income pretty low. We just had some dividend income and I earned some pay from board work. Mostly, we just lived off of savings.
Our accountant pointed out that married couples with income less than $80K pay 0% long-term capital gains tax. I hadn’t paid attention to that before, so we exploited that wrinkle in the tax code by selling a big traunch of appreciated stock on 12/29.
Here’s the long-term capital gains tax table …
We saved about $12K from the move, which won’t change our FIRE lifestyle, but will pay a few years of accountant bills. I love it when she than ‘earns her keep’ on our financial team with good tax advice.
It was critical to get it in before the ball dropped on New Years Eve as 2021 may be the only time I can take advantage of a low-income year to get the 0% capital gains opportunity. My full MegaCorp pension kicks in on 2/1 and we have some stock option sales coming up later in 2022.
Any good year end tax strategies you took advantage of in 2021?
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MrFireStation 
Just FYI, it’s actually even more than $80K. I believe the numbers in that table represent taxable income, so they do NOT include any deductions to income (including the standard deduction). So for a married couple taking the standard deduction in 2021 ($25,100), you can have over $100K in capital gains income and not pay taxes on it 🙂
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Yes – Good point, Keith! In fact, we even put $50K into a donor-advised fund to minimize our taxable income even more.
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Chief, I would appreciate more details on the mechanics of donor advised funds. Are you transferring shares or holdings to the fund? Then are you writing off the transfer as a donation, without having to recognize a capital gain?
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Yes & yes. I’m sure I’ll write more about it, but yes – donated appreciated stock. Our accountant modeled out the whole thing for us this past summer and we executed it the last week of the year.
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My wife and I minimize taxes by selecting stocks that pay Qualified Dividends and CEF municipal bond funds that pay AMT free interest. Stable investments avoids capital gains.
I have 1099 consulting income that I use to fund my health insurance with pre-tax dollars and make maximum employee $27,000 and employer (which is really me) 20% Annual Contributions into a Solo 401-K. The goal is to use these funds to provide the benefits of good health insurance and continuing to feather our retirement kitty without adding to our taxable income.
We keep our MAGI below the phaseout for the American Opportunity Credit and the next income bracket for my wife’s income adjusted Medicare Premium.
Just before the end of the year, we contacted the Social Security Administration to inform them of the change in circumstances where we were both working in 2020 full time despite receiving a pension , because Covid-19 made us a afraid to follow through on our plans to retire. We were able to get the Premium set to next year’s forecasted income which will be much lower than 2020.
My three sons used to be stock flippers who were trying to make quick profits. I have taught them by buy, hold, and reinvest in Qualified Dividend stocks that are growing. The income stream will be lightly taxed, if at all, and will eventually grow to become their primary income.
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Very well thought-out, as usual! We too invest a lot in municipal bond funds and tuck board income away in a SEP.
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You might want to look at using a Solo 401-K instead. If you read most websites, it looks very daunting with a list including getting an Employer Identification Number from the IRS and developing a Plan Document. Most providers either ask you to get the Plan Documents from a third party provider or send you PDF’s that you have to fill out yourself.
The EIN, you can get online from IRS in just a couple minutes. I found that Vanguard seemed to simplify the account setup and Plan Document setup over anyone else I was researching. I simply called their Small Business Retirement Services and was transferred to a specialist who interviewed me and generated the Plan Documents and setup the accounts. They setup two accounts. One is the Administrator’s Account that you use to transfer funds from your bank over to the participant’s accounts. They also setup an account or accounts for the participants if your wife is also participating. The whole process took me less than a couple hours.
Here are the numbers. You can have a profit sharing contribution from your employer (which is you) of 20% of the amount left over after subtracting your expenses and 1/2 of your Self-Employment (SS and Medicare) taxes. Then you can contribute another $27,000 annually of your income that is left over after subtracting expenses, Self-Employment Taxes, and your Profit Sharing Contribution. There is an exception for Solo 401-K’s that would allow your wife to contribute another $27,000 of the salary you pay her. For a married couple that is $54,000, plus an additional 20% Profit Sharing.
The maximum contribution limit for each of you and your wife is $61,000, plus the $6,500 over 50 catchup limit.
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I will ask my accountant about it. My LLC already has an EIN number, so that part is done. I’ve got to figure out whether or not to put the new townhouse under the LLC or to buy it personally too.
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One of the first questions Vanguard will ask for is your EIN. The second question is the structure of your business. I was very happy with their onboarding process. They have a nice selection of mutual fund offerings at reasonable cost as well. The only cost is an annual account fee of $20 per mutual fund until the balance exceeds $50K.
It is shameful how much time and effort we have to spend to figure out how to optimize our finances after taxes. One would almost think Congress is on the take and are trying to reward their friends, and their friends are not the little guy or the middle class.
Wouldn’t it be more straightforward to allow people to contribute as much to an IRA as a 401-K without the income limitations? How about letting those who are paying their own health insurance to be able to pay for it with pre-tax dollars, just like you do when paying through a business?
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