Post-2012 tax gain harvesting [Wiki]

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floydtime
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Post-2012 tax gain harvesting [Wiki]

Post by floydtime »

The wiki on tax gain harvesting (http://www.bogleheads.org/wiki/Tax_gain_harvesting) appears to be out of date, since long-term capital gains are still taxed at 0% for those in the 10% and 15% tax bracket. The wiki still says that these are "scheduled to increase" in 2013, but that is no longer the case...is it?
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Re: Post-2012 tax gain harvesting

Post by LadyGeek »

Thanks! The link in human readable format: Tax gain harvesting

Here's the relevant wiki page: Capital gains distribution

It looks like the 2012 tax bracket gains taxes have remained the same for 2013, but with the additional possibility of a Net Investment Income (NII) tax hit.

I'm not sure how to word the update, as there is some guidance on what to do as a result of the taxes. Do you have a suggestion?
Wiki wrote:
  • An investor in the 10% or 15% bracket may choose to claim capital gains in 2012 or earlier, to take advantage of the 0% capital gains rate which is scheduled to terminate after 2012.
  • An investor in a higher tax bracket may choose to claim capital gains in 2012 or earlier, to avoid taxation under the currently-scheduled higher capital gains rates for 2013 and forward.
  • An investor in the lowest tax bracket (currently 10%) may choose to accelerate capital gains under the assumption that he/she will be in a higher tax bracket in future years. (Current law affords a lower tax rate to capital gains in the lowest tax bracket even after 2012.)
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masteraleph
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Re: Post-2012 tax gain harvesting

Post by masteraleph »

How's this?
Wiki wrote:
Under the assumption that he/she may have more taxable income in future years, an investor might accelerate capital gains. They might do so:

*Up to the top of the 15% bracket, in order to take advantage of the 0% capital gains tax rate for this bracket.

*Up to the top of the ACA NII tax threshold for their filing status, in order to avoid paying the 3.8% surtax in future years.
With appropriate links.
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LadyGeek
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Re: Post-2012 tax gain harvesting

Post by LadyGeek »

Looks good to me, I updated the wiki: Tax gain harvesting

I also fixed the article format, the example is now easier to read. Since I'm not a tax expert, does anything else need to be updated?

The article is marked to be in need of improvement (Please expand this article). Does this article have enough information to be considered complete?

===========================
FYI- Suggestions to update the wiki can be posted in Suggestions for the Wiki. Where a detailed discussion is needed (like this), starting a new thread is preferred. Be sure to PM a wiki editor to get our attention.

We gratefully appreciate suggestions - no matter where they are posted. :happy
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House Blend
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Re: Post-2012 tax gain harvesting

Post by House Blend »

I think the article could use a few more cautions.

For example, it could be a mistake (or impossible) to harvest gains when you also have carryover losses.

And it could be a mistake to harvest gains if you could make better use of space in the 15% bracket, such as by converting tax deferred amounts to Roth.

(A puzzle that comes up frequently is how to make best use of a one-time dip into a low tax bracket. Tax gain harvesting is one such option--at least in the 15% bracket; Roth conversion is another. And a variation on Roth conversion is to decrease tax-deferred contributions in favor of more Roth contributions.)

A recent thread along these lines is here:
http://www.bogleheads.org/forum/viewtop ... 1&t=121061

There were a lot more like this in Q4 of 2012 when everybody and their uncle was certain that their tax rates on LTCG were going up. And at least for a few with high incomes, those rates did go up. But my recollection is that there were quite a few people that didn't grasp the ramifications of TGH (and whose rates didn't go up).

Presumably this is why the wiki article was created in the first place.
Last edited by House Blend on Fri Aug 16, 2013 9:54 am, edited 1 time in total.
Wagnerjb
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Re: Post-2012 tax gain harvesting

Post by Wagnerjb »

House Blend wrote: (A puzzle that comes up frequently is how to make best use of a one-time dip into a low tax bracket. Tax gain harvesting is one such option--at least in the 15% bracket; Roth conversion is another. And a variation on Roth conversion is to decrease tax-deferred contributions in favor of more Roth contributions.)
I would recommend that people strongly consider the Roth conversion, as those taxes will never be due (if you pay them today at 0%). On the other hand, you have other avenues to avoid the capital gains tax. One is to donate the appreciated shares to charity. Another is to gift them to children...who may be able to pay zero tax on the gains.

(Offsetting the capital gains with tax losses is not the same as avoiding the taxes. The losses have value, and you offset this value with the 15% capital gain liability. Thus, that isn't equivalent to the two alternatives that truly avoid the capital gains tax liability).

Best wishes.
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House Blend
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Re: Post-2012 tax gain harvesting

Post by House Blend »

Wagnerjb wrote:
House Blend wrote: (A puzzle that comes up frequently is how to make best use of a one-time dip into a low tax bracket. Tax gain harvesting is one such option--at least in the 15% bracket; Roth conversion is another. And a variation on Roth conversion is to decrease tax-deferred contributions in favor of more Roth contributions.)
I would recommend that people strongly consider the Roth conversion, as those taxes will never be due (if you pay them today at 0%). On the other hand, you have other avenues to avoid the capital gains tax. One is to donate the appreciated shares to charity. Another is to gift them to children...who may be able to pay zero tax on the gains.
I agree with your preference for Roth over TGH and for pretty much the same reasons, but I thought we were talking about someone (temporarily) in the 15% bracket. That conversion would cost 15%, not 0%.
Wagnerjb
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Re: Post-2012 tax gain harvesting

Post by Wagnerjb »

House Blend wrote:
Wagnerjb wrote:
House Blend wrote: (A puzzle that comes up frequently is how to make best use of a one-time dip into a low tax bracket. Tax gain harvesting is one such option--at least in the 15% bracket; Roth conversion is another. And a variation on Roth conversion is to decrease tax-deferred contributions in favor of more Roth contributions.)
I would recommend that people strongly consider the Roth conversion, as those taxes will never be due (if you pay them today at 0%). On the other hand, you have other avenues to avoid the capital gains tax. One is to donate the appreciated shares to charity. Another is to gift them to children...who may be able to pay zero tax on the gains.
I agree with your preference for Roth over TGH and for pretty much the same reasons, but I thought we were talking about someone (temporarily) in the 15% bracket. That conversion would cost 15%, not 0%.
Good point. Thanks.
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floydtime
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Re: Post-2012 tax gain harvesting

Post by floydtime »

Thanks so much, LadyGeek - this looks great and is much clearer!

One thing I see though is the following...
The 2012 lower capital gains rate only applies to taxpayers who are in the 15% bracket even when the amount of the capital gain is included. A taxpayer with $20,000 in taxable income and $100,000 in unrealized gains would provoke a substantial tax bill by attempting to tax-gain harvest the full amount of their capital gains.
...which might be edited to remove the "2012", mightn't it?
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Re: Post-2012 tax gain harvesting

Post by LadyGeek »

Good eyes, you mightn't be right: Tax gain harvesting
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Re: Post-2012 tax gain harvesting

Post by LadyGeek »

House Blend wrote:I think the article could use a few more cautions.

For example, it could be a mistake (or impossible) to harvest gains when you also have carryover losses.

And it could be a mistake to harvest gains if you could make better use of space in the 15% bracket, such as by converting tax deferred amounts to Roth.

(A puzzle that comes up frequently is how to make best use of a one-time dip into a low tax bracket. Tax gain harvesting is one such option--at least in the 15% bracket; Roth conversion is another. And a variation on Roth conversion is to decrease tax-deferred contributions in favor of more Roth contributions.)

A recent thread along these lines is here:
http://www.bogleheads.org/forum/viewtop ... 1&t=121061

There were a lot more like this in Q4 of 2012 when everybody and their uncle was certain that their tax rates on LTCG were going up. And at least for a few with high incomes, those rates did go up. But my recollection is that there were quite a few people that didn't grasp the ramifications of TGH (and whose rates didn't go up).

Presumably this is why the wiki article was created in the first place.
The recent thread was quite helpful. I summarized the discussion about the possible loss of Tax Loss Harvesting as "Offsetting with capital losses." The thread also mentioned the retirement Savers Credit, which I added.

Additionally, I did some organizing to follow the Tax Loss Harvesting article structure. This was important, as several existing ideas were not apparent.

Please review carefully: Tax gain harvesting
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Re: Post-2012 tax gain harvesting

Post by kaneohe »

You might want to include in the wiki a recommendation that folks use tax software or a tax calculator like Taxcaster to check their assumptions about what
should happen. Because of the various interactions of the income components and easy-to-make assumptions (incorrect), it is easy to go wrong here if concepts
are not correct.
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Re: Post-2012 tax gain harvesting

Post by LadyGeek »

Thanks, tax planning added: Tax gain harvesting
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Re: Post-2012 tax gain harvesting

Post by House Blend »

LG,
The Wiki wrote:While carryover losses, or losses incurred during the year, can be used to offset capital gains, care must be taken to ensure that future use of Tax Loss Harvesting is not precluded.
I suggest this revision:
Carryover losses, and losses realized during the year, must be used to offset realized gains. The tax benefits of these losses may outweigh the benefits from harvesting gains.
Either phrasing is something of an "it depends" cop-out.

To be less of a cop-out, I think the point needs to be made that the benefits of tax loss harvesting followed by tax gain harvesting (in a later year) are in opposition; they tend to cancel each other out. I'm not claiming that an investor with carryover losses should never TGH, but it is at minimum a red flag.

On the other hand, if TGH is followed by TLH (with no prior carryover losses), both strategies are working in concert. After TGH you've raised your cost basis, which makes it easier to harvest losses later. And later losses may be worth more, if your tax bracket or LTCG tax rate is higher.
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Re: Post-2012 tax gain harvesting [Wiki]

Post by LadyGeek »

Thanks. That's a good concise explanation; which is now in the wiki: Tax gain harvesting

I spelled out the acronyms, as readers won't see the article in the context of this thread (what is TLH, TLG, etc.?), along with adding a few references.

I also retitled the thread to highlight this is a wiki discussion.
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Re: Post-2012 tax gain harvesting [Wiki]

Post by hansp »

In the overview section, Scenario point 3 should explicitly state that Alice and Bob are now in the 25% tax bracket (20% LTCG) It's implied by the numbers, but should be made explicit.

Something like:
"Alice and Bob are now in the 25% tax bracket (20% long term capital gains tax) and sell their shares."
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Re: Post-2012 tax gain harvesting [Wiki]

Post by LadyGeek »

You got it. I checked Capital gains distribution and didn't see a 20% long-term capital gains rate. I changed the example to 15% to follow the IRS. Bob still pays triple the taxes.

See: Tax gain harvesting
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Re: Post-2012 tax gain harvesting [Wiki]

Post by Peter Foley »

Tax gain harvesting is done with respect to long term capital gains. Short term capital gains are treated as ordinary income.
I can't off hand think of a common instance of when one might tax gain harvest short term capital gains. Certainly one could do so in a year where total income was below the level at which it would be taxed at all, but this is not common.

Since the references on the Wiki are to the 15% bracket, it is clear that the tax gain harvesting that is being done is long term. That should be made clear.

Perhaps:
Tax-gain harvesting, as opposed to tax-loss harvesting, is the process of turning unrealized long term capital gains into realized capital gains at a specific time for tax purposes.
Overview

In general, it is considered advantageous to delay the realization of capital gains as long as possible. Consequently, tax-gain harvesting is often counter-intuitive and less frequently discussed.

Under the assumption that he/she may have more taxable income in future years, an investor might accelerate long term capital gains. They might do so:[1]
I would also be tempted to add IRS Publication 550 as a reference.
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Re: Post-2012 tax gain harvesting [Wiki]

Post by LadyGeek »

I made it clear, and included Publication 550: Tax gain harvesting
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Re: Post-2012 tax gain harvesting [Wiki]

Post by jonathan2001 »

You may wish to provide the following, potentially useful additional context for tax gain harvesting -- which I think works.

If you're a parent/custodian for your child's UTMA account, you can take advantage of the first $1000 (in 2013) in unearned income being exempt from federal taxes, and the subsequent $1000 being taxes at the child's natural tax rate (which would presumably be 10% for non-qualified unearned income, and 0% for LT gains). Of course, typically any unearned income above the $2000 limit jumps up to the parent's tax bracket.

(1) If you're giving funds to your child... transfer appreciated securities, and liquidate from the UTMA account, and the first $2K in gains is tax-exempt.

(2) Harvest any unrealized gains in the UTMA account (perhaps once a year) by selling assets, and then buying them back the next day. The wash rule doesn't apply to gains, so the only negatives are (i) the transactional/brokerage costs, if any, (ii) the opportunity cost of being out of the market between the two transactions.

These small tactics can (1) preserve assets for your child and (2) minimize future tax liabilities for the child once he/she reaches majority.
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Re: Post-2012 tax gain harvesting [Wiki]

Post by LadyGeek »

jonathan2001 wrote:You may wish to provide the following, potentially useful additional context for tax gain harvesting -- which I think works.
Welcome! For the wiki, we need to be sure. I'll defer to the experts.

Wiki article link: Tax gain harvesting
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Re: Post-2012 tax gain harvesting [Wiki]

Post by calwatch »

The other reason to do tax gain harvesting, as discussed in the various ACA subsidy threads, is either a) to qualify for an ACA subsidy or b) get out of the Medicaid eligibility zone and into a private health plan. Tax gain harvesting can be done very precisely to achieve a certain level of income necessary to qualify for these programs, which require minimum income to qualify.
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