Tax Gain Harvesting can be a tax-smart move for some investors. An important area of tax planning involves properly managing the recognition of capital gains and losses each year. This article focuses on the federal treatment of capital gains and does not take into account individual state treatment of capital gains. Readers are encouraged to review their individual circumstances with a qualified tax professional. This information is provided for education purposes only and is not intended to be tax or legal advice.
Depending on your situation, it may make sense to realize gains in low-rate years and use capital losses strategically, preserving losses for years with higher- taxed gains. Decisions about harvesting gains vs. losses should be made in coordination with a tax professional.
When can it make sense to tax gain harvest can depend on your taxable income. Depending on your filing status and taxable income level, long-term capital gains may be harvested at a zero percent Federal capital gains tax rate. Long term is defined as a holding period more than one year.
Source: Internal Revenue Service. Amounts in table subject to annual adjustments
Items to consider when thinking of tax gain harvesting:
1) Generating potentially tax-efficient cash flow. In some cases, long-term gains may be taxed at 0% federally, but the sale still increases taxable income and may affect other taxes (including Net Investment Income Tax and state income tax liability) and benefits.
2) You can buy back the investments you just sold for a gain and reset (increase) your cost basis, potentially reducing future taxable gains (subject to market risks and transaction costs).
3) You can use the gain harvesting for a portfolio rebalancing tool.
4) Even if federal tax is 0%, state taxes may still apply, and some states do not provide preferential long-term rates. If you moved during the year or file in multiple states, state treatment can vary significantly.
*Realizing gains can trigger the 3.8% Net Investment Income Tax (NIIT) for higher-income households.
Come see us at Citadel Wealth Management, we are passionate about investment tax management, in coordination with your tax professional, we can guide as to what play to call when it comes to capital gains and losses.
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