A Tax Strategy for all Those Gains

Capital gains

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!


Share on facebook
Share on twitter
Share on linkedin

What’s your financial archetype?

Simplify your life with a plan

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.