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SAR66
Level 2

Capital Gains after selling a mutual fund on my first year of Retirement

This is my first full year of retirement so no Wages this year. Just started taking my Social Security so with 6 months of that and a pension my income for this year should be around $31,000 - 32,000. I was told by a Certified Financial Planner that I should be in a lower tax bracket and should not have to pay any capital gains tax if I  sell a mutual fund that is underperforming and transfer to a fund with less risk. I am 66 years old. Does that sound correct?

3 Replies
rjs
Level 15
Level 15

Capital Gains after selling a mutual fund on my first year of Retirement

You will not have to pay any tax on the capital gain provided that:


(A) the gain is long-term, AND

(B) your total taxable income, including the capital gain, is not more than $41,675 (for 2022, filing as single).


Note that taxable income is not the same as total income or AGI. Taxable income is on Form 1040 line 15. For 2022, if you are filing as single and over 65, your standard deduction will be $14,700. So if your total income, not including the capital gain, is $32,000, your taxable income would be $17,300 plus the capital gain. That means you could have up to $24,375 of long-term capital gain that would not be taxed. (Technically the long-term capital gain is included in your taxable income, but the tax rate that applies to the long-term capital gain is 0%.)

 

Not all of your Social Security will be taxable, but you have not given enough information to determine how much, if any, would be taxable.

 

dmertz
Level 15

Capital Gains after selling a mutual fund on my first year of Retirement

If you are receiving Social Security benefits, as rjs said the increase in taxable income caused by the inclusion of the capital gain can make more of the Social Security benefits taxable.  This side effect would make your marginal tax rate on the capital gain be nonzero even though the tax rate on the capital gain itself is zero.  You'll need to prepare a simulated tax return to see what change in tax liability is caused by a change in capital gains income.

 

You also need to check the marginal tax rate on your state income tax return.

Opus 17
Level 15

Capital Gains after selling a mutual fund on my first year of Retirement

If you are single, the first $40K of taxable income is taxed at the 10% or 12% rate.  That means that long term capital gains will be taxed at 0%.  But if your total taxable income (including capital gains) goes over that amount, part of your gain will be taxed at 15% (instead of the 22% rate for regular income and short term capital gains).  You get a $12,550 standard deduction, but part of your SS benefit might become taxable depending on the amount of your pension.  So very roughly speaking, and assuming you are single, the first 20K of any capital gains you realize will probably be tax-free.  

 

If you gain is less than that from selling the fund you are thinking about, you might sell other investments to scrape right up to the zero tax limit.  However, if you sell anything at a loss, make sure that if you want to re-invest any of the proceeds in the same or similar investments you wait at least 31 days.  

 

The Taxcaster should give you a pretty close estimate.

TaxCaster tax calculator

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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