Tax GAIN Harvesting ?

[travelover]

DW retired this year and it occurs to me that I should be tax gain harvesting now that we are back into the 15% bracket because in 6 years, with RMDs, we will be back in the 25% bracket. Does this make sense?

Also, during the crash, I did a lot of tax LOSS harvesting and have been working it off since, at $3000 a year. If I churn enough stock to get us to the top of the 15% bracket, can I still make use of the capital gains losses that I have been carrying forward?

 

[Texas Proud]

I think it is a good idea unless you are getting ACA credits... your credit will go down, so in effect you are paying a tax...

Yes, you can use all of your loss carryforward to offset current gains... now that you are in the 15% bracket they are not worth much anymore...

 

[NW-Bound]

15% now instead of 25% later? Hmmm... Is it the same as one bird in hand now instead of no bird later? Assuming no ACA ramifications of course.

About the $3K cap loss carryover, I thought it is allowed no matter what bracket you are in.


PS. I just saw TP's answer above, and remember that cap loss has to cancel out cap gain first before it can cancel out earned income and interest. So, it does nothing. Unless you go above 15%?

 

[joesxm3]

Keep in mind that the long term capital gain rate for the 10% and 15% brackets is 0%.

If you use your carry forward losses to cancel out long term gains, you might end up having a low gain total versus 0% tax on a larger gain total.

If you have some non-Roth IRA's, perhaps you should do a Roth conversion at the 15% rate now to avoid having the RMD kick you into the higher bracket later.

If you did not harvest the LTCG now, then you could use up $3000 of the loss against ordinary income this year, plus lock in some IRA at 15%.

You did not say how close you are to the top of 15%. I guess that would control how much you could convert.

 

[mpeirce]

DW retired this year and it occurs to me that I should be tax gain harvesting now that we are back into the 15% bracket because in 6 years, with RMDs, we will be back in the 25% bracket. Does this make sense?

I certainly can, though it depends on the details.

One example: I've been helping my Dad harvest gains over the last few years. He's in the 0% CG rate with his income. At some point he may very well have to cash enough to outgrown the 0% CG rate, so I cycle just enough of his investments to take him to the top of the 0% CG rate. This keeps moving his basis up nicely.

 

[DrRoy]

Sounds good to me.

 

[Texas Proud]

Keep in mind that the long term capital gain rate for the 10% and 15% brackets is 0%.

If you use your carry forward losses to cancel out long term gains, you might end up having a low gain total versus 0% tax on a larger gain total.

If you have some non-Roth IRA's, perhaps you should do a Roth conversion at the 15% rate now to avoid having the RMD kick you into the higher bracket later.

If you did not harvest the LTCG now, then you could use up $3000 of the loss against ordinary income this year, plus lock in some IRA at 15%.

You did not say how close you are to the top of 15%. I guess that would control how much you could convert.

Yes, this is a better idea.... converting does not count as cap gain.... and you can take the $3K loss.... but, it does involve paying taxes now... but if you will be in the 25% bracket later then 15% now is much better....



But... who knows what changes are going to happen to taxes.... that is a big 'what if' question.... you still can do one year and if things change and something else is better, then change what you do....

When I took a tax course in college the prof said he loved teaching taxes as he can give the same test and the answer can change over the years!!!!

 

[pb4uski]

DW retired this year and it occurs to me that I should be tax gain harvesting now that we are back into the 15% bracket because in 6 years, with RMDs, we will be back in the 25% bracket. Does this make sense?

Also, during the crash, I did a lot of tax LOSS harvesting and have been working it off since, at $3000 a year. If I churn enough stock to get us to the top of the 15% bracket, can I still make use of the capital gains losses that I have been carrying forward?

I looked at this when I first retired... in fact I did some tax gain harvesting my first year because at the time it was unclear if 0% capital gains would continue.

In our case, the tax benefit from doing Roth conversions (9% now vs 25% later) exceeds the value of capital gains. You may be asking... how does he get 10% for Roth conversions... well, since my interest and dividend income is less than our itemized deductions and exemptions, a portion of our Roth conversion is not subject to tax since it is covered by itemized deductions and exemptions, some is at the 10% rate and the rest at the 15% rate and it all boils down to about 9%.

Hypothetical example for 2016 assuming MFJ and $20k of qualified dividends and no ACA subsidies:

	2016
TI at top of 15% tax bracket		75,300
Standard deduction		12,600
2 exemptions	4,050	8,100
		96,000
Qualified dividends and LTCG		(20,000)
Roth conversion		76,000
Deductions and exemptions	0%	20,700	-
$0-$18,550	10%	18,550	1,855
$18,551-$75,300	15%	36,750	5,513
		76,000	7,368
Effective tax on conversion				9.7%
Qualified income	0%	20,000	-
Total tax			7,368
Total effective tax rate				7.7%
Total income		96,000
Deductions		(12,600)
Exemptions		(8,100)
Taxable income		75,300

So just in 2016, this hypothetical couple will pay $7,368 in tax on a $76,000 conversion, where if they do conversion after SS and pensions start they will likely pay 25% so they save a lot.

 

[LOL!]

It is not clear if the OP is asking if they can "reserve" their carryover losses and not use them up since they would be in the 15% marginal income tax bracket where the LTCG tax is 0%. The answer is "No, you cannot reserve those losses, but MUST use them to offset realized capital gains first."

So, one can do tax-gain harvesting, but only after all one's carryover losses are used up.

See also: https://www.bogleheads.org/wiki/Tax_gain_harvesting

 

[travelover]

OP here, thanks for all the thoughtful answers. It looks like I'd be smarter to do Roth conversions between now and age 70 1/2 than the capital gains harvesting. It should be obvious, but sometimes it helps to have someone else point it out.

 

[ziggy29]

I'm looking into this now, planning on doing it this year. Just making absolutely sure there are no tax gotchas for doing so -- pretty sure there aren't.

I can probably take close to $20K in LTCGs without going out of the 15% bracket. So it seems to me that it is obviously advantageous to sell enough stocks to net maybe $15-18K in LTCG (using FIFO to make sure oldest shares are sold first, all held for more than a year), and immediately repurchase them. Effectively that gives me a "free" step up in cost basis.

(I don't plan to try to milk every dollar out of this because this strategy would be *very* costly if you accidentally poke into the 25% bracket.)

Of course there are caveats -- first we aren't dealing with ACA subsidies since that messes with MAGI; secondly, we are not carrying over losses which would eat up the gains while eliminating the ability to offset ordinary income. And if I thought we'd be back in the 25% or higher bracket in retirement, I'd consider using the leftover 15% bracket for Roth conversions. But I don't think we will be. Tax rates may go up but I'm not sure they will go up enough to hit someone with my projected income for 25% or more.