Impact selling collectible car on taxes

[howjltx]

I know a collectible car comes with a 28% collectible LTCG tax.

I will retire next year with a MFJ income less than $90K, meaning my normal LTCG tax rate will stay at 0%.

Last year and this year I will be in the 37% Tax bracket due to my IRA to ROTH conversions MAGI = $800K.

Next year I will be in the 12% Income tax bracket.

What is the impact of selling my collectible car for $100,000 profit I have owned for years, only the additional $28,000 tax? I don't have any other passive income, so MIIT won't be an impact.

I will owe 37% Income tax on ~S800k (- Std Deduction & -exemptions).

Will not draw SSI for 4 more years and will not go on Medicare until after 3 more years.

What other tax impact am I not properly considering here?

Note: numbers are faked to protect the innocent.

[Vanessa A]

You may need to pay state and local taxing authorities on the profit on the sale.  Also, if your state has senior credits or low income credits, this sale may affect your ability to claim the credits. 

If you sell in the year where you have a 12% tax bracket, your tax is capped at 12% instead of 0%.  The collectors tax is UP to 28%.  Basically, it is taxed at your ordinary income tax rate UP to 28%.

For federal taxes, the year the income is received, is the year it is to be taxed.  Making the payment when you sell the car will help you to not have to pay interest and underpayment penalties.  

 Before the sale and after the sale years, it has no impact.  

Since you are not getting social security for 4 years, it won't impact how that is taxed.  

If you held off on selling until you received social security, it would cause your social security to be taxed at 85%

Since you are not collecting social security for 4 more years, I am assuming you are under 65 years old.  If so, then you would not yet qualify for the bonus senior tax deduction.

Other things it could possibly impact are any tax credits that you would claim that max out at certain income levels such as education credits or passive activity losses on rental properties.

If your return is just going to be standard W-2 income for the year you sell and few credits that you qualify, you may not see much of a difference other than the 28%.

Depend on the year you do it, you may be subject to the 3.8% Net Investment Tax which kicks in for MFJ at $250,000.  

Again, depending on the year you sell, possibly the AMT 

I would suggest doing a dummy return in TurboTax and see what your numbers look like.  They won't be perfect because you are using 2025 software for a future tax scenario, but if could give you a decent rundown of what your overall situation would look like using the exact numbers you expect to see and your exact overall situation. 

Depending on the year and your age, you may be subject to IRMMA when it comes to Medicare, as they do do a look back. 

[howjltx]

@Vanessa A Thank you for the detailed response and here are some facts I should have had in my first post:
I'm in Texas so, no State / Local Tax, working 1.5 more years, MFJ, over-65, SSI@70, Medicare ~2029 (when IRMAA=$0). 
Considering selling since this is my last year taxed >32%, in 2027=24%, rest of life=12% with no RMD (my retirement income will be set up to keep me within the LTCG rate =0%). Thinking it is better to sell this year because if I ever sell in the future, I will it will likely cost me $15K-25K more in Taxes/IRMMA/>$15k LTCG in those years. NIIT passive income $50k this year, dropping each year by 10-20%. For the past 3 years been running future scenarios in my previous years' TurboTax converting all my IRA to ROTH, will do this again this year and next until all IRA is in ROTH. 

One last question, in January I did another Roth conversion and need to pay estimated tax before 15 April (or now?) do I do this at the 24% (like winning the lottery rate) or the >32% (this years expected tax rate)?

[DaveF1006 · Accepted solution]

Yes, you’ve got the “sticker price” of the collectible tax right. But with an $800,000 MAGI and a $100,000 gain, there are three hidden tax impacts this year that didn’t apply when you were in the 12% bracket.

You mentioned a $100,000 profit. Collectibles (Art, Antiques, and specialized "Collectible Cars") are taxed at a maximum rate of 28%.  Because you are in the 37% ordinary bracket, your collectible gain will be taxed at the 28% cap.

The hidden impact of this is that collectible gains are "stacked" on top of your ordinary income. While the gain itself is capped at 28%, it pushes every other dollar of your "regular" Long term Captial Gains (LTCG)  (if you had any) into the 20% bracket. Since you said you have no other passive income/LTCG, this won't hurt you directly, but it effectively uses up your lower tax rungs of the LTC.

You mentioned you don’t have “other” passive income, but the $100,000 gain from the car is considered Net Investment Income.

1. Threshold: For married couples filing jointly, the Net Investment Income Tax (NIIT) applies once your MAGI goes over $250,000.
2. Impact: With your MAGI at $800,000 from the Roth conversions, the full $100,000 gain will be subject to an extra 3.8% tax.
3. Total Tax Rate: Your effective federal tax rate on that car is 31.8% (28% plus 3.8%), not just 28%.

Even though you aren't on Medicare for 3 more years, your 2026 income is the "Look-back" year for your 2028 premiums.If you are on Medicare in 2028, the Social Security Administration will look at your 2026 Tax Return. With an $800k MAGI + $100k gain ($900k total), you will hit the highest tier of IRMAA. For a couple, this can add up to $12,000 to $15,000 per year in surcharges for Part B and Part D.

Since you plan to start Medicare in 2029, the increase in 2026 may no longer affect you by then. If you sell in 2027, though, that could raise your 2029 premiums. Selling in 2026 is a safer option for Medicare if you’re starting coverage in 2029.

@howjltx 

[howjltx]

@DavidF1006

Everything you said in your replay was what I was under the impression of and thank you for the conformation.

My Delima is to decide this year to keep my cars and enjoy them the rest of my life (pass on to someone as inheritance) or just sell now, pay the tax this year so the cars won't become a burden during my wondering around the world retirement years. Fortunately, my Birthday is in January so I will use Cobra (which now is cheaper than Obama Care) to let me delay Medicare until after I finish converting all my IRA into ROTH funds. The next year after that, I will drop to 12% MFJ Tax bracket and be locked into 0% LTCG the rest of my life (or until the tax laws change again)

[Opus 17]

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@howjltx wrote:

One last question, in January I did another Roth conversion and need to pay estimated tax before 15 April (or now?) do I do this at the 24% (like winning the lottery rate) or the >32% (this years expected tax rate)?

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A Roth conversion performed in January 2026 will be reported on your 2026 tax return.  Conversions can't be retroactive like contributions sometimes can be, they only happen when they happen.  Because of how the rules on estimated tax payments work, you can pay the entire estimated payment by April 15, or you can divide the estimated payment into 4 equal payments to be paid April 15, June 15, Sept 15 and January 15, 2027, and still avoid a penalty for underpayment.  You should pay the amount you expect to owe for 2026, since conversions are taxed as regular income.   If you owe more than $1000 when you file your return in Spring 2027, you could be assessed a penalty for underpaying your estimated payments.  (But you can take advantage of the timing rules to split the payment up.)

(And, if you are expecting a lump sum of income that will raise your tax bracket in 2026, it was possibly not the best time to do a conversion.  You typically want to do a Roth conversion when you expect your other income to be lower, so you are not over-taxed on the conversion.)