During a time when the stock market is experiencing a strong rally, investors are looking for ways to maximize their gains while minimizing their tax liabilities. One lesser-known strategy that has gained popularity is tax-gain harvesting. This tactic involves strategically selling profitable assets in your brokerage account during lower-income years to take advantage of the 0% capital gains tax rate.
The S&P 500 has seen significant growth this year, with a surge of more than 18% year to date as of August 26th. This growth has been driven by investor anticipation of interest rate cuts from the Federal Reserve in September. As the market continues to perform well, investors are looking for ways to capitalize on their gains while also being mindful of potential tax implications.
Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, explains the benefits of tax-gain harvesting: “A lot of times when we’re doing this, we’re looking to realize those gains at 0%.” This strategy is particularly advantageous for individuals in lower income brackets, such as those in the early years of retirement or periods of unemployment.
The concept of tax-gain harvesting revolves around the capital gains tax brackets, which apply to long-term capital gains from assets held for over a year. By strategically selling assets during years when your taxable income falls within the 0% capital gains rate threshold, you can save on taxes and potentially reset your basis for future gains.
For the year 2024, individuals can qualify for the 0% capital gains rate with a taxable income of up to $47,025 for single filers and up to $94,050 for married couples filing jointly. These rates are based on “taxable income,” which is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
One of the key benefits of tax-gain harvesting is the ability to rebalance your brokerage assets without triggering gains. By selling profitable assets and immediately repurchasing them, you can reset your basis and potentially reduce future gains. This strategy can be especially advantageous for married couples filing jointly, as Lucas points out: “It’s very lucrative, especially if you’re married.”
Sean Lovison, founder of Purpose Built Financial Services in the Philadelphia area, emphasizes the importance of tax-gain harvesting in reducing future gains. By strategically selling assets at a profit and then repurchasing them, investors can reset their basis and potentially lower their tax liabilities in higher-earning years.
When it comes to executing a tax-gain harvesting strategy, timing is crucial. Lucas suggests that the “sweet spot” for harvesting gains is typically in October or November, once investors have a better idea of their taxable income for the year. It’s important to leave some buffer room to avoid hitting the 15% capital gain bracket, he advises.
While tax-gain harvesting is generally more attractive in lower-income years, there are potential pitfalls to consider. For example, younger retirees who rely on marketplace health insurance may jeopardize their premium tax credits with higher income levels. It’s essential to carefully evaluate your individual financial situation and consult with a financial advisor before implementing a tax-gain harvesting strategy.
In conclusion, tax-gain harvesting can be a valuable tool for investors looking to maximize their gains and minimize their tax liabilities. By strategically selling profitable assets during lower-income years and taking advantage of the 0% capital gains rate, investors can potentially save on taxes and reset their basis for future gains. As with any investment strategy, it’s important to carefully consider your individual financial situation and consult with a financial advisor to determine if tax-gain harvesting is right for you.