My husband went into a nursing home at the end of February, and the nursing home costs of $7,500 a month are almost entirely deductible as medical expenses (over 7.5% of income because he is over 65). Our taxable income last year was a little under $100,000, but I inherited some money and invested it fairly aggressively so I have enough to pay for maybe 5 years of nursing home. I am still working but my own retirement benefits are excellent and I have some protected retirement savings so I don't have to worry too much about impoverishing myself. I'm guessing my husband will live more than 1 year but he is very unlikely to live more than 2 or 3 given his diagnosis of multiple system atrophy.
So I have at least this year and maybe 2 or 3 years where high medical deductions will mean that my taxes are much lower and my tax rate on long term capital gains is $0 (for a married couple filing jointly there is no tax on long term capital gains if your taxable income is less than $73,000). I have always been a long term investor, so I own a number of stocks where more than half the value is capital gain. If I think radically, I can imagine that it would make sense to sell all my stocks and then immediately rebuy the ones I would plan to keep longer than a year, cashing out those those long term capital gains while I will owe no taxes on them. I probably won't be in this situation of zero taxes on long term capital gains when I retire--single people pay no tax on capital gains when their taxable income is below $36,000.
My tax preparer says consider selling extra stocks at the end of the year while I don't have to pay capital gains tax. My broker says sell the mutual funds first to take advantage of the continuing growth and income from the stocks, but I think that advice is self-interested (and I am looking into changing brokers). My elder care lawyer no longer practices in this state and her focus was very much Medicaid and trusts, not taxes.
Has anyone done any bold changes in the way they handled investments when medical expenses changed their tax rate?
If your joint taxable income is a little under 100,000 then that is above the 73,000 threshold for tax. Perhaps that is not a taxable number but the gross income number you mentioned. In such a case with 90,000 in medical deductions it does give you some amount of free room where capital gains up to that amount do not incur tax.
I would look at your own expected income after retirement and separately if you are still working next year and you are single. Use the same capital gains amount in each of the three scenarios: now, working income and single, retired income and single.
It sounds like there would be an advantage to taking a measured amount of capital gains income this year. The reason is that the gap between your two single incomes (working and retired) and the 36,000 are likely to be smaller and therefore the same actual amount will draw more tax.
There is a second aspect to your considerations which is net worth. Right now you own stocks in the black where there is a safety margin of profit protecting your capital investment. Should you sell and buy back your advantage is the lower tax but your opportunity cost is that you now rebought your own stocks at today's prices. If they then go down you have a capital loss - not a reduction in profit margin. On this part I would thin the winners thus reducing my average investment cost per stock if I did go ahead and take advantage of the marginal tax rate on my capital gains situation.
I would never sell a stock I think is going up over time to take advantage of a tax rate because my realized advantage has the opportunity cost of not making more profit on the stock once I no longer have it. I would always sell a stock I think has exhausted itself regardless of tax rate because it's now dead money. That is the engine that created the situation. Tax rates are the tail on this dog where success outweighs tax considerations or the entire exercise is not succeeding. If it is succeeding I might trim sails but I keep going because capital gains are always bigger than the tax they incur reaping them.
In summary if I had stocks I want to get out of anyway then I would do the exercise and see what amount of capital gains I can incur "free". I would expect the stocks I hold long term to double over the next 10 years at a minimum which is just 7% compounded. That will draw a lot more capital gains tax. And that's a good thing.
Thanks! That figure for our taxable income was for last year. This year will be different because of the large medical deduction--that will put our taxable income under $73,000. And I just checked and one is still allowed to file jointly if the spouse dies during the tax year. What I had missed and you have helped me understand is that there there is only a limited amount of capital gain that I can take for free, even though capital gains are not taxed as income. I found this article, http://moneyover55.about.com/od/taxplanning/a/Year-End-Tax-Planning.htm, which gives a little more information. I see the tax game of selling and immediately rebuying is not allowed when selling at a loss, but I don't see a rule against it when selling at a profit (and in fact this article http://www.fool.com/personal-finance/taxes/wash-sales-and-worthless-stock.aspx mentions there is no parallel rule). But that doesn't matter because the $30,000 or so in capital gains I can take tax free will be fairly easily used up. If I go over the limit are they then all taxed?
I'm in Canada and the rules are different but I am also not allowed to sell at a loss and rebuy without a 30 day waiting period. I also know of no such rule when we sell at a profit. We also have a 50% rule where half our actual loses or gains is the rate which is taxed. It will be worth knowing what rules apply to reporting capital gains in your state.
It will be your most profitable stocks which add the most capital gains. If you have multiple stocks you like then consider spreading the selling across them when you have 200 shares or more of them. It diversifies the risk.
You have to sell them by a certain date to allow them to be settled within the calendar year. I would sell no later than November because December is tax loss selling month. What the right choice in that window is I don't know but I advise that if you settle on which stocks and you're satisfied with the price now - do it.
You would almost certainly be taxed on just the difference because it would be punitive if because you went over by $1 you would forfeit all those rights. The tax preparer should be able to determine that and it will be on the forms in how you calculate the amount you must report.
Also keep in mind that you may have the opportunity to do this again next year and possibly longer.
Thanks for starting this thread. My DH now qualifies for our federal and provincial disability tax credit, which has changed the amount of income tax we need to pay by a considerable amount, and I have been thinking about how to take advantage of this situation.