Capital gain harvesting

[KingMota]

There was another thread on this topic that got derailed. Several YouTube Financial Advisors have posted recently suggesting filling up the 0% LTCG bracket and potentially resetting your cost basis in your taxable investment brokerage accounts if you have funds available beyond current cash flow requirements. As long as you stay below IRMAA limits and are aware of any FPL / MAGI implications for those getting ACA subsidies it seems like a free lunch the way they present it. One thing they are leaving out, however, at least for where I live (Kentucky) is that Capital Gains are taxed as regular income.

For me, I have overall about 50% gains in my taxable account so I do have some interest in this topic. Also, I would like to migrate most of my mutual funds to ETF's anyway to lower dividends and focus more on capital gains. It certainly appears you can sell one fund and buy a similar one the next day without any consequences (unlike wash sale rules on Capital loss sale harvesting).

Is anyone trying to take advantage of this strategy? I have recently gotten into Pralana Online and it lets you model and optimize a lot of things, but this is not really one of them.

 

[pb4uski]

Yes, many of us have done this and subject to the constraints that you mention, it really is a free lunch. And you are correct, if yu have a gain the wash sale rules don't apply so you can sell at a gain and turn around and buy the exact same ticker symbol if you want.

If you have any near term plans to move to a no-tax state then you might want to defer gains trading but it isn't uncommon to have no federal tax but state tax.

Most commonly it is done in December once you have a real good read on yur tax situation for the year.

 

[SecondCor521]

My daughter did capital gain harvesting in December. They graduated from college in May and started their first real job last summer. As a result of the AOTC and their tax situation, they were able to realize all of their capital gains and it all fit into the 0% LTCG bracket. They will pay state ordinary income tax on the gains, but if they stay in the same state (note pb4uski's comments on this above) it would be due on gains anyways and we have essentially a flat tax here.

A couple of comments:

1. It's only LTCG. STCG are taxed at your ordinary income tax rate and there is no 0% rate there (well, except for the standard/itemized deduction).

2. Any realized LTCG adds to AGI even if taxed at 0%. So this affects, as OP mentions anything based on AGI/MAGI including: state income taxes, IRMAA, ACA subsidies, and FAFSA SAI. It also can affect eligibility for other tax credits/adjustments/deductions like eligibility to contribute to IRAs, and various credits with income phaseouts like education credits, retirement contributions savings credit, EITC, and the like. Plus potentially state tax items that may be similarly throttled based on AGI or state taxable income levels (my state doesn't have many of these, but others might - don't know about Kentucky).

3. LTCG also are included in provisional income, so it affects the taxability of SS benefits.

 

[ERD50]

One other consideration - if you are in a position where you might be passing those LTCG to any heirs, they will (under current law) get the step-up basis, so no LTCG tax anyhow.

So you could use the 0% tax area for Roth conversions instead, if that works for you.

Changing funds to lower dividend taxation as you mention, seems reasonable as well.

 

[Exchme]

If you are on ACA, then above 2.0x FPL, the premium credits phase out at a rapid pace on a sawtooth pattern that averages about 15% up until 4x FPL, so that's no improvement vs. selling as needed later and just paying the capital gains taxes. From 4x FPL until completely phased out, the ACA premium credit phaseout is costing you 8.5%, so there's a little bit of benefit to gain harvesting.

Once you are not on ACA, then gain harvesting competes with Roth Conversions for the low tax space. In our case, Roth Conversions were more urgent.

You are right that while Pralana lets you set an overall unrealized gain and then estimates capital gains taxes when you sell assets, it does not have a way to do gain harvesting. I don't actually think any of the consumer grade tools handle it. To model it right, you want to be able to do like in real life, where you select which assets you want to sell, along with the unrealized gains in them and that would get complicated real fast, plus most folks would never sit still to set up all that detail even if a program had the ability to do it.

 

[audreyh1]

One other consideration - if you are in a position where you might be passing those LTCG to any heirs, they will (under current law) get the step-up basis, so no LTCG tax anyhow.

So you could use the 0% tax area for Roth conversions instead, if that works for you.

Changing funds to lower dividend taxation as you mention, seems reasonable as well.

Also in community property states the surviving spouse gets 100% step up basis on accounts titled joint with rights of survivorship.

I see this is not the case for Kentucky, but you’ll still get 50% step up basis.

 

[Taco]

This relates to something I've been wrestling with...

Assume a couple is in their 50s, and is 10 years away from taking Social Security.
During that 10 years, their income will leave 50K of annual headroom before
- their tax bracket changes from 12 to 22%
- their long term cap gain (LTCG) tax changes from 0 to 15%.
They have 500K (or more) in traditional IRAs / 401K.
They have 500K (or more) in capital gains, in an after tax account.
There are no ACA issues to worry about.

Question: Should they use these 10 years with this annual 50K income headroom to do Roth Conversion or to harvest LTCG?

The expected savings on the Roth Conversion is 10% (22-12).
The expected savings on the LTCG is 15%. (15-0).

Paying no taxes is enticing. And 15% > 10%. So that would favor harvesting LTCG.
But if the assets with LTCG are left to someone, they get a stepped up cost basis, and 0 tax. Of course right now, we don't know whether we will need the LTCG assets. (Actually, we will need some of them to get to 59.5 when we have access to the IRA funds, but certainly not all.)
And then if we do mostly LTCG harvesting rather than Roth conversions, that could lead to higher tax brackets when RMDs hit.
It makes my head spin. I'm going to invest in some software to try and help model all of this, but in the meantime...

Anyone have any wisdom regarding this type of situation?

 

[target2019]

There was another thread on this topic that got derailed. Several YouTube Financial Advisors have posted recently suggesting filling up the 0% LTCG bracket and potentially resetting your cost basis in your taxable investment brokerage accounts if you have funds available beyond current cash flow requirements. As long as you stay below IRMAA limits and are aware of any FPL / MAGI implications for those getting ACA subsidies it seems like a free lunch the way they present it. One thing they are leaving out, however, at least for where I live (Kentucky) is that Capital Gains are taxed as regular income.

For me, I have overall about 50% gains in my taxable account so I do have some interest in this topic. Also, I would like to migrate most of my mutual funds to ETF's anyway to lower dividends and focus more on capital gains. It certainly appears you can sell one fund and buy a similar one the next day without any consequences (unlike wash sale rules on Capital loss sale harvesting).

Is anyone trying to take advantage of this strategy? I have recently gotten into Pralana Online and it lets you model and optimize a lot of things, but this is not really one of them.

We (the retirees and both children) have different cases, so LTCG optimization is executed differently. But what is common is out-sized gains. The two stocks were the result of one kid's stock plans, of which we all received portions of the shares.

When daughter was injured at work, and unemployment insurance ended, she sold 1/2 of her position at 0% gain. I classify that as a tactical move. It will not appear again given her marital status now.

We (the retirees) have an ongoing plan to sell shares of all taxable brokerage individual holdings, and re-deploy the cash. Some is used now, some re-invested in an ETF - SCHD.

Son is busy experiencing the world, so his needs are unique. I'm not sure how his LTCG works out, but it's dependent on which country is taxing the LTCG. For example, in a particular EU country, it is taxed at 25%, so there is no advantage.

So, it can be a free lunch, but your particulars drive how much applies in your unique case.

I have a very simple spreadsheet that covers 10 years of a rough plan. It's high level. The sheet is useful as an estimated tax snapshot. I can play what-if to find available tax headroom in the current year.

Every individual has the possibility for special conditions, IOW what you watch for. We keep an eye on income level for our state, as that results in retirement income exclusion for state income tax, or not.

 

[target2019]

This relates to something I've been wrestling with...

Assume a couple is in their 50s, and is 10 years away from taking Social Security.
During that 10 years, their income will leave 50K of annual headroom before
- their tax bracket changes from 12 to 22%
- their long term cap gain (LTCG) tax changes from 0 to 15%.
They have 500K (or more) in traditional IRAs / 401K.
They have 500K (or more) in capital gains, in an after tax account.
There are no ACA issues to worry about.

Question: Should they use these 10 years with this annual 50K income headroom to do Roth Conversion or to harvest LTCG?

The expected savings on the Roth Conversion is 10% (22-12).
The expected savings on the LTCG is 15%. (15-0).

Paying no taxes is enticing. And 15% > 10%. So that would favor harvesting LTCG.
But if the assets with LTCG are left to someone, they get a stepped up cost basis, and 0 tax. Of course right now, we don't know whether we will need the LTCG assets. (Actually, we will need some of them to get to 59.5 when we have access to the IRA funds, but certainly not all.)
And then if we do mostly LTCG harvesting rather than Roth conversions, that could lead to higher tax brackets when RMDs hit.
It makes my head spin. I'm going to invest in some software to try and help model all of this, but in the meantime...

Anyone have any wisdom regarding this type of situation?

You don't need software. You presented this as either/or (I highlighted your statement). Those are two choices at the extremes of a continuum of choices. I would do something along the continuum, and each year determine the split (LTCG / Roth-conv). Do you need the fruit now, or later? Maybe your decision is *now and later* for one year, then something slightly or vastly different in the ratio.

 

[target2019]

We (the retirees and both children) have different cases, so LTCG optimization is executed differently. But what is common is out-sized gains. The two stocks were the result of one kid's stock plans, of which we all received portions of the shares.

When daughter was injured at work, and unemployment insurance ended, she sold 1/2 of her position at 0% gain. I classify that as a tactical move. It will not appear again given her marital status now.

We (the retirees) have an ongoing plan to sell shares of all taxable brokerage individual holdings, and re-deploy the cash. Some is used now, some re-invested in an ETF - SCHD.

Son is busy experiencing the world, so his needs are unique. I'm not sure how his LTCG works out, but it's dependent on which country is taxing the LTCG. For example, in a particular EU country, it is taxed at 25%, so there is no advantage.

So, it can be a free lunch, but your particulars drive how much applies in your unique case.

I have a very simple spreadsheet that covers 10 years of a rough plan. It's high level. The sheet is useful as an estimated tax snapshot. I can play what-if to find available tax headroom in the current year.

Every individual has the possibility for special conditions, IOW what you watch for. We keep an eye on income level for our state, as that results in retirement income exclusion for state income tax, or not.

tldr; Summary of this content from Gemini in google sheet:

This table appears to track a couple's projected income and expenses over a 15-year period, likely for retirement planning. It includes details like their individual incomes, Social Security benefits, pensions, annuities, and withdrawals from retirement accounts like IRAs. Additionally, it highlights Roth conversions and Required Minimum Distributions (RMDs), both important aspects of retirement financial planning.

 

[Dalton]

More than half my investable assets are in taxable, so I'm expecting that I will use some of that during retirement, thus it won't all be inherited with stepped up basis. Also, my IRA isn't huge, and I don't have a pension, so I plan to start taking funds from the IRA annually starting at 59.5, and assuming typical growth (large % of fixed in IRA), my RMDs aren't expected to put me in any kind tax bomb situation. Thus, I lean more toward gains harvesting than Roth conversions, though either would serve a legitimate purpose.

A couple years ago, I'd quit working and then received some inheritance with some chunks of cash coming to me several times that year, i.e. the only income I had was some cap gains and a small RMD I had to take on an inherited IRA. Oh, and I was getting health insurance via COBRA. So at the end of the year, I filled up my 0% LTCG bracket and zeroed out a fair amount of CG.

Now I'm getting ACA subsidies, so that is a factor. Last year, I didn't quite withdraw (spend) as much as I had estimated to determine the ACA subsidy, so at the end of the year I had a little headroom in my ACA budget and in the 0% LTCG pot. I could have gotten some ACA premium money refunded, but I don't pay a lot and like to contribute, so did a chunk of gains harvesting.

 

[indiajust]

Difficult situation to address, as I have done one, done the other, done them together, but do them for different reasons and have never combined my reasoning. I don't think a clean optimization path exists. I tend to believe that taxes must rise, so I fill a bracket if I can, by default. I did my Roth conversions in the context of tax writeoffs that would be lost otherwise. So I consumed them as available, on a use it or lose it basis.

I never faced a decision to do one or the other, or some mix of both concurrently, as a joint optimization problem.

During my annual rebalances I moved income inside the Roth. I rotate stocks inside my Roth to limit LTCG overhang (just in case...) since it costs nothing to do so.

My thought is that if I should move to a state with income taxes, I would prefer not to arrive with a golden egg of LTCG tax liability. So my only decision is how much is too much? and should I fill 2 brackets instead of just 1?

Schwab offers direct indexing accounts which automagically tax loss harvest and rebalance on the fly, perfect for anchor positions in US and exUS. This is better than I can do since they limit risk algorithmically as well.

I pay all the bills from my one taxable account I manage, which I continue to be lucky/wise enough to have LTCG to talk about.

With conversions done, leaving enough gains to balance out a market correction is my only reason to sit on gains.