Harvesting Investment Gains
You likely have heard of harvesting investment losses in non-retirement accounts to have Uncle Sam share in some of the loss. Capital losses can be used to offset gains and reduce your tax bill.
But what about harvesting long-term gains? If you find yourself in a low earnings year, like after retiring, taking a sabbatical, or even a job loss, where you may have no earned income at all.
This gives you an opportunity to take capital gains at the 0% capital gains tax rate. For couples filing jointly, so long as income in 2023 is less than $89,250, capital gains are taxed at a 0% rate. For single filers, the limit is $44,625. You saw that correctly, 0%.
Be aware that capital gains recognized is considered income, so the standard deduction applies to capital gains. If you have no other income and only recognize capital gains, add the standard deduction ($27,700 married filing jointly, $13,850 for single) to the income limits to arrive at the total gains that can be realized. This totals $116,950 for married, and $58,475 for single filers. Once the income limit is exceeded, the amount over the limit is subject to the 15% capital gains tax rate.
This can be especially powerful for those that have highly concentrated, highly appreciated positions in their portfolio and have been reluctant to diversify due to the tax impact. In this case, the concentration risk can be mitigated, while paying no capital gains taxes.
For example, Sara is taking a sabbatical with her husband in 2023 and they will have no earned income this year. She has a concentrated position in the stock of the company she works for with $100,000 worth of long-term gains. In 2023, she can choose to recognize the entire $100,000 long-term gain and pay no taxes on that gain.
$100,000 long-term gain - $27,700 standard deduction = $72,300
Since $72,300 is below the income limit of $89,250 for a couple filing jointly, no long-term gains tax is due.
So depending on Sara’s needs, cash availability and risk tolerance she can use this year of zero earned income to do some constructive tax and investment planning.
Understanding how taxes impact your assets can lead to better choices that result in you keeping more of your money. Tax gain harvesting is not a tax dodge, rather it’s a functional usage of the tax code to pay only what is required by law.