A Tax Strategy for all Those Gains

Capital gains

Please note the publish date of this blog. Financial information, market conditions, and other data mentioned in this post may no longer be accurate or relevant.

Have you benefited from the so-called “Trump rally”; the sharp rise in stock markets that started after the November 8th US presidential election? If so, you may be able to reap additional benefits by following a tax saving strategy referred to as “tax gain harvesting”.

If your investment account has risen in value over the past year, there is a high likelihood that your account has investments with unrealized capital gains. What are unrealized capital gains? This applies to investments that have risen in value but have not yet been sold. Once an investment is sold the capital gain (increase in value) becomes realized and Uncle Sam wants a piece of that gain.

If you sell long-term (held 12 months or longer) capital gain investments, under current Federal tax law, individual and joint tax filers with taxable income below $37,950 and $75,900, respectively, pay a 0% tax rate on the gain from the sale. That’s right, you read correctly, you will pay no federal tax on the gain. Long-term capital gains tax rates for taxpayers with taxable income above the $37,950 and $75,900 thresholds are either 15% or 20%, depending on your total taxable income.

Example Illustration

Let’s say a single person after tax deductions has a total of $30,000 in taxable income ($20,000 from Social Security and $10,000 from a pension). If this individual was to sell $20,000 in long-term capital gain investments, the first $7,590 ($37,950-$30,000) would be taxed at 0% and the remaining $12,410 ($20,000-$7,590) would be taxed at 15%.

To implement the tax gain harvesting strategy, sell long-term capital gain investments where the 0% federal tax rate applies and immediately reinvest the proceeds from the sale back into the same investment. Voila, you have locked in a 0% tax rate on the gain that has occurred and remain invested for future potential growth. An added bonus being that the “wash sale” rules that apply to tax loss harvesting, do not apply to tax gain harvesting.

The tax gain harvesting strategy may apply to your situation if you happen to be one of the following: retired, working part-time, on a fixed income, taking an unpaid sabbatical from work, or have significant federal tax deductions. This strategy can also be applied across multiple calendar years.

Important items to consider before applying this strategy…

  1. The 0% federal tax rate only applies to long-term capital gains. These are capital gains related to investments that you have held for more than 12 months. Additionally, depending upon your tax situation, state tax may apply to realized long-term capital gains.
  2. Realized capital gains will be added to the taxable income you already have. Keep this in mind as you consider how much in long-term capital gains to recognize.
  3. Increasing your taxable income, by recognizing long-term capital gains, could impact other tax credits, deductions and tax strategies, such as Roth IRA conversions. Consult with your Tax Preparer, CPA, and/or Financial Advisor before recognizing any capital gains.
  4. This strategy is best applied towards the end of each calendar year, once you have a good sense of your gross income, tax deductions and unrealized capital gains and losses.

At Abacus, we are always looking for ways for you to keep more of the money you have earned. Follow up with your Abacus Financial Advisor to see if the tax gain harvesting strategy makes sense for you. Happy Harvesting!

Disclosure

Abacus Wealth Partners, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Abacus Wealth Partners, LLC by the SEC nor does it indicate that Abacus Wealth Partners, LLC has attained a particular level of skill or ability. This material prepared by Abacus Wealth Partners, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Abacus Wealth Partners, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Abacus Wealth Partners, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners, LLC is not an accounting or legal firm. Please consult with your tax and/or legal professional regarding your specific tax and/or legal situation when determining if any of the mentioned strategies are right for you.

Please Note: Abacus does not make any representations or warranties as to the accuracy, timeliness, suitability, and completeness, or relevance of any information prepared by an unaffiliated third party, whether linked to Abacus’ website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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