Late to the party. I think this is correct. Corrections requested so I learn and don't mislead.
Brilliant work, OP. Thanks.
Noticed many questions so gathered some background information to hopefully clarify OP's technique.
Dates: Declaration Date, Ex-Dividend Date, Record Date, Payable Date:
See: https://www.investopedia.com/ask/answer ... d-date.asp
See: https://www.investopedia.com/terms/r/recorddate.asp
Tax reporting.
--STCG from our selling: reported on 1099B, processed on Sch D, offset by carryover loss, net ($0-$3K) flows to 1040 line 7, reduces taxable income.*
--STCG from internal fund operation: reported on 1099DIV box 1a, processed on Sch B, flows to 1040 line 3b (ordinary dividends), adds to taxable income.
* OP's technique vs state tax return. Fed taxable income (2023 1040 line 15) is first input to (my) state taxable income. So OP's selling (tax gain harvest**), offset by carryover losses, is ignored by fed tax return (not part of fed taxable income), so not added to state taxable income. Meaning it receives same tax benefit as a single-state muni fund---fed/state tax exempt---maybe better tax treatment than a single-state muni since SS IRMAA MAGI adds back muni dividends but not offset CGs (don't know about ACA). Brilliant.
** Tax gain harvest. Selling to harvest a CG instead of a dividend, is a recognized wiki strategy.
See "Tax gain harvesting": https://www.bogleheads.org/wiki/Tax_gain_harvesting
OP's use of carryover losses to offset tax gain harvest is a logical use of wiki topic.
BH advice: don't harvest CG with carryover loss. OP's harvesting of STCGs gain would seem to an exception to general BH advice to not harvest CGs with a carryover loss; the reason being:
--We CAN control when we harvest a CG, we can't control when we received income---better to save carryover loss to offset what we can't control.
--If we have limited amount of carryover loss, offsetting harvested (tax benefited) LTCG or STCG, it could better be used to offset (no tax benefit) $3K of ordinary income.
OP's technique's annual benefit is much more than that---unlimited carryover loss offsetting large CGs* + $3K of ordinary income. Brilliant.
* OP's only limiting factor would seem to be the amount of principal he has to rollover each month.
It would seem the only things required to make this strategy run well/smoothly are:
--Large carryover loss---not planned to use for another purpose.
--Large principal to rollover each month.
--An inverted-yield interest-rate environment to boost return of ST bonds.
--ST bond fund/ETF (minimize interest-rate risk) that embeds dividends in NAV---M* price chart exhibits a clear saw-tooth pattern.
--Bond fund/ETF distribution schedule---to guide selling/buying.
--Ensure sale proceeds have settled to pay for next purchase---verify brokerage requirements.
Downside. This strategy will be less effective (invested principal will produce less after-tax income vs ...LT muni?) when ST bond yields revert to normal. But it's a handy technique to have during inverted-yield environments.
Idea. Need to monthly check SGOV's SEC yield vs your alternative (favorite muni's taxable-equivalent yield?) to know when to change course.
Wish I'd learned of OP's technique sooner.
Brilliant work, OP. Thanks.
Noticed many questions so gathered some background information to hopefully clarify OP's technique.
Dates: Declaration Date, Ex-Dividend Date, Record Date, Payable Date:
See: https://www.investopedia.com/ask/answer ... d-date.asp
See: https://www.investopedia.com/terms/r/recorddate.asp
Tax reporting.
--STCG from our selling: reported on 1099B, processed on Sch D, offset by carryover loss, net ($0-$3K) flows to 1040 line 7, reduces taxable income.*
--STCG from internal fund operation: reported on 1099DIV box 1a, processed on Sch B, flows to 1040 line 3b (ordinary dividends), adds to taxable income.
* OP's technique vs state tax return. Fed taxable income (2023 1040 line 15) is first input to (my) state taxable income. So OP's selling (tax gain harvest**), offset by carryover losses, is ignored by fed tax return (not part of fed taxable income), so not added to state taxable income. Meaning it receives same tax benefit as a single-state muni fund---fed/state tax exempt---maybe better tax treatment than a single-state muni since SS IRMAA MAGI adds back muni dividends but not offset CGs (don't know about ACA). Brilliant.
** Tax gain harvest. Selling to harvest a CG instead of a dividend, is a recognized wiki strategy.
See "Tax gain harvesting": https://www.bogleheads.org/wiki/Tax_gain_harvesting
OP's use of carryover losses to offset tax gain harvest is a logical use of wiki topic.
BH advice: don't harvest CG with carryover loss. OP's harvesting of STCGs gain would seem to an exception to general BH advice to not harvest CGs with a carryover loss; the reason being:
--We CAN control when we harvest a CG, we can't control when we received income---better to save carryover loss to offset what we can't control.
--If we have limited amount of carryover loss, offsetting harvested (tax benefited) LTCG or STCG, it could better be used to offset (no tax benefit) $3K of ordinary income.
OP's technique's annual benefit is much more than that---unlimited carryover loss offsetting large CGs* + $3K of ordinary income. Brilliant.
* OP's only limiting factor would seem to be the amount of principal he has to rollover each month.
It would seem the only things required to make this strategy run well/smoothly are:
--Large carryover loss---not planned to use for another purpose.
--Large principal to rollover each month.
--An inverted-yield interest-rate environment to boost return of ST bonds.
--ST bond fund/ETF (minimize interest-rate risk) that embeds dividends in NAV---M* price chart exhibits a clear saw-tooth pattern.
--Bond fund/ETF distribution schedule---to guide selling/buying.
--Ensure sale proceeds have settled to pay for next purchase---verify brokerage requirements.
Downside. This strategy will be less effective (invested principal will produce less after-tax income vs ...LT muni?) when ST bond yields revert to normal. But it's a handy technique to have during inverted-yield environments.
Idea. Need to monthly check SGOV's SEC yield vs your alternative (favorite muni's taxable-equivalent yield?) to know when to change course.
Wish I'd learned of OP's technique sooner.
Statistics: Posted by dratkinson — Sat Sep 21, 2024 12:27 am — Replies 45 — Views 10119