For us, going back home (to the United States) means enrolling in an ACA health insurance policy and potentially stepping into the clutches of a State tax authority (e.g. California.)

Does this mean we will Never Pay Taxes Again?



The United States taxes its citizens on worldwide income, irregardless of where they live, so we have been working with that system throughout our “retirement.” (Quite effectively, I must say.)

With the addition of California State taxes and the effective tax rates of the ACA, we would now be juggling 3 unique tax systems. That seems a tad more difficult than working with just 1, but is the real situation of many early retirees in the US.

I’m a visual thinker so I made some charts of how these 3 tax system overlap.

At the Federal level, there are different tax rates for different income types. Our discretionary income is largely from Long Term Capital Gains, which are tax free below an AGI of ~$100k and 15% above (Blue line in chart.)

Conversely, California taxes all income types equally, with marginal tax rates up to 13.3%. Fortunately, rates only go as high as 8% in our income range of interest (Purple line in chart.)

Federal and California Tax Brackets

Additionally, we have the ACA. I previously explored the financial implications of the ACA in great depth. If any of the following is unclear, please check that background info.

Cliff Notes: As income increases towards 300% FPL, ACA subsidies decrease at a rate of 15%, and then at 9% up to 400% FPL. Smaller subsides mean higher premiums. For Silver Plans Only, CSR (cost sharing reduction) phaseouts result in higher deductibles and co-pays, which will increase costs at time of care. The subsidy cliff (the complete elimination of subsidies) occurs at 400% FPL plus $1, resulting in a massive premium increase ($7,700 in this case.) The cliff gets worse over time, doubling to ~$15,000 for a 60 year old me.

ACA Tax for a Family of 3 (dollar amounts different for other family sizes, but shape the same)

These 3 distinct tax systems overlap as shown in the Marginal Tax Rate chart below, which is simply the sum of the marginal tax rates from Federal, California, and ACA.

Sum of Federal, California, & ACA tax systems. CSR/Subsidy Cliff Impulses not to scale.

How I interpret this chart: For most of the income range from ~$30k to $200k, qualified dividends and long term capital gains will be taxed at more than 15%. The 6-8% tax rate from 83k / 400% FPL to ~100k is lower, yes, but that is small consolation for going over the ACA subsidy cliff ($7,700 cost!)

Going Back to Cali

In a previous post, I ended with the following scenario – We are living large in California, with:

  • Taxable income of $40,000/year from dividends & interest
  • $70,000/year cost of living ($ sourced tax-free from stock sold at basis, Roth IRA contributions, & seasoned Roth conversions.)
  • Free health insurance
  • Zero tax burden across Federal and State combined

It sounds nice, but…  this position is quite fragile.

With the overhead of the ACA and CA taxes, we would no longer be able to harvest capital gains tax free. Over time our ability to sell stock at full basis would disappear… 10 years of 5% capital growth means 40% of every sale becomes a gain.  That’s the way it is with long-term capital gains over the long term. (Tax free Roth IRA conversions would also be a thing of the past.)

And if we really needed a large lump sum, say to buy a Tesla X or a nice boat, then we would most certainly go over the ACA subsidy cliff. There’s nothing like adding an extra $7,700 to every major purchase.

This doesn’t sound good.

Actual Tax Burden

From the idilic case of zero tax burden, each additional dollar of investment income will result in an increased cost of living in the form of taxes and higher insurance premiums.

In the following chart, I look at our effective tax rates and additional tax paid across all 3 tax systems as we increase taxable capital gains above our base income of $40,000.

Some noteworthy data points:

  • Effective tax rates for income <400% FPL are never less than 16.9%
  • Going off the subsidy cliff is painful (+$7,700 in tax, tax rate jumps to ~33%. Or infinite, depending on how you look at it.)
  • Harvesting more capital gains to average subsidy cliff over greater income drops tax rate to 25.5% at ~$100k (when Federal tax will start to apply.)
  • Additional capital gains ($100k+) will be taxed at 23%+.

Harvesting Massive Capital Gains

In any typical year where we wanted more capital gains without going over the ACA subsidy cliff, we would be paying a minimum of 17% in tax.

In any year where we fell off the subsidy cliff, we would be paying tax rates of 23%+ at best.

There is simply no way around this for a California resident.

But maybe we can minimize the damage…  what if we harvested massive amounts of capital gains before returning to the US? (Or for that matter, before entering any residential tax system country which taxes worldwide income.)

Over the past 5 years we have harvested over $147,000 in capital gains, completely tax free. From this already stepped up basis, we could harvest an additional $200k-$400k of capital gains over the next 2 years (enough to keep us below the NIIT (net investment income tax) of 3.8%.) This would mean $500k-$1KK of stock at basis.

This would all be taxed at 15%. Is paying 15% tax today better than paying 17-23% tax later?

The downside is we lose any interim (potential) gain or dividend income on the tax paid.

The upside is the fragile scenario of $40k annual income with no tax burden and free health insurance becomes much more robust (for at least another 5-10 years? Time erodes all things.)

The risk is the ACA tax system is replaced by a system with no income dependency (as in the latest Repeal & Replace efforts – unlikely for next 4-6 years.)


Moving back to the US/California has major tax implications, putting us firmly into the crosshairs of 3 tax systems: Federal, State, and ACA.

In any year where we needed/wanted to tap into capital gains we would pay a tax rate of 17%+. In years where we wanted to tap deeply into gains, we would pay 23%+ largely due to the ACA subsidy cliff. This gets worse over time as insurance premiums increase with age (doubling as I reach age 60.)

But in most years our total income would be less than 400% FPL, in which case the highest amount we would pay for tax and health insurance would be <$6,000/year (<$500/month.) (Roughly $2k to California and $3-4k in health insurance premiums.) Additionally, we could have ~$2,000 in annual expenses in “medium usage” health care expenses, based on estimates by Covered CA. This could be much higher in years with expensive health issues (an accident or a major illness.)

While the marginal rates are somewhat high, the effective tax rate is fairly reasonable at less than 10% ($6k / $80k.) Plus we get health insurance with that.

To minimize the potential for going over the ACA subsidy cliff, I could choose to pay 15% tax today by harvesting Massive Amounts of Capital Gains. This would result in significant tax payments but result in lower future tax burden and significantly greater flexibility. This assumes a lower overall marginal rate ends up being the better deal.

Tax now or more tax later?