Is TLH in 12% bracket less worthwhile?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
mbasherp
Posts: 211
Joined: Mon Jun 26, 2017 8:48 am

Is TLH in 12% bracket less worthwhile?

Post by mbasherp » Tue Oct 23, 2018 9:04 am

With my variable income, I have begun to realize that we will end up firmly in the 12% tax bracket this year (no state taxes). I realize this is an advantage from a dividend perspective, making qualified dividends tax free. But today I'm considering my first tax loss harvest move (VTSAX total stock market into VLCAX large cap) and I'm wondering if it is worthwhile.

1) Am I correct that my September dividend from VTSAX might become nonqualified and taxed at 12% instead of 0% if I sell these shares I accumulated in the past 6 months?

2) I expect to be in the 22% bracket in the majority of future years. Does this make it less desirable to take losses now in the 12% bracket?

3) Even if I book maximum losses for one year (3k), at my 12% tax rate I'm only able to deduct $360. That's a far cry from the benefit the high income crowd seems to gain. Would you still go ahead?

Theoretically, I could book ~2k in short term losses today, if that matters.

KlangFool
Posts: 12999
Joined: Sat Oct 11, 2008 12:35 pm

Re: Is TLH in 12% bracket less worthwhile?

Post by KlangFool » Tue Oct 23, 2018 9:19 am

OP,

You will save $360 in tax via TLH. If you do nothing, you will pay $360 in taxes. So, what is the question? Unless you like paying taxes, what won't you do this?

KlangFool

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Is TLH in 12% bracket less worthwhile?

Post by Ron Scott » Tue Oct 23, 2018 9:29 am

mbasherp wrote:
Tue Oct 23, 2018 9:04 am
Even if I book maximum losses for one year (3k), at my 12% tax rate I'm only able to deduct $360. That's a far cry from the benefit the high income crowd seems to gain.
I think the wealthy do better on TLH if they never sell.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

crit
Posts: 477
Joined: Mon Jan 05, 2015 12:54 pm

Re: Is TLH in 12% bracket less worthwhile?

Post by crit » Tue Oct 23, 2018 9:37 am

Can you also harvest some gains, and use the TLH to offset those gains, saving yourself capital gains tax later?

Topic Author
mbasherp
Posts: 211
Joined: Mon Jun 26, 2017 8:48 am

Re: Is TLH in 12% bracket less worthwhile?

Post by mbasherp » Tue Oct 23, 2018 9:44 am

crit wrote:
Tue Oct 23, 2018 9:37 am
Can you also harvest some gains, and use the TLH to offset those gains, saving yourself capital gains tax later?
My taxable account is new this year, so I also don't have dramatic gains to benefit from this, unfortunately.

Topic Author
mbasherp
Posts: 211
Joined: Mon Jun 26, 2017 8:48 am

Re: Is TLH in 12% bracket less worthwhile?

Post by mbasherp » Tue Oct 23, 2018 9:48 am

KlangFool wrote:
Tue Oct 23, 2018 9:19 am
OP,

You will save $360 in tax via TLH. If you do nothing, you will pay $360 in taxes. So, what is the question? Unless you like paying taxes, what won't you do this?

KlangFool
In particular, my questions 1 and 2 above. Would this act turn September's tax free dividends into taxable dividends (reducing my benefit)? Also if I lower my cost basis now for a 12% gain, but happened to sell in a later year in the 22% bracket with a 15% LTCG rate, what have I actually gained? Haven't I lowered my cost basis for a time when I'll be in a higher tax bracket, paying more in the future?
Last edited by mbasherp on Tue Oct 23, 2018 9:51 am, edited 1 time in total.

adam1712
Posts: 411
Joined: Fri Jun 01, 2007 5:21 pm

Re: Is TLH in 12% bracket less worthwhile?

Post by adam1712 » Tue Oct 23, 2018 9:51 am

crit wrote:
Tue Oct 23, 2018 9:37 am
Can you also harvest some gains, and use the TLH to offset those gains, saving yourself capital gains tax later?
You should not use TLH to offset gains. The gains will already be taxed at 0% in the 12% tax bracket. In the 12% bracket you should try not to have capital gains and losses in the same year.

KlangFool
Posts: 12999
Joined: Sat Oct 11, 2008 12:35 pm

Re: Is TLH in 12% bracket less worthwhile?

Post by KlangFool » Tue Oct 23, 2018 9:57 am

mbasherp wrote:
Tue Oct 23, 2018 9:48 am
KlangFool wrote:
Tue Oct 23, 2018 9:19 am
OP,

You will save $360 in tax via TLH. If you do nothing, you will pay $360 in taxes. So, what is the question? Unless you like paying taxes, what won't you do this?

KlangFool
In particular, my questions 1 and 2 above. Would this act turn September's tax free dividends into taxable dividends (reducing my benefit)? Also if I lower my cost basis now for a 12% gain, but happened to sell in a later year in the 22% bracket with a 15% LTCG rate, what have I actually gained? Haven't I lowered my cost basis for a time when I'll be in a higher tax bracket, paying more in the future?
mbasherp,

<<Would this act turn September's tax free dividends into taxable dividends (reducing my benefit)?>>

I do not know this answer. But, unless your taxable account is very big, the amount of dividend is so small that it won't matter.

<<Also if I lower my cost basis now for a 12% gain, but happened to sell in a later year in the 22% bracket with a 15% LTCG rate, what have I actually gained? >>

You get to decide what lot to sell and when to sell. So, I do not see this as a problem. Conversely, it is entirely possible that you could have a low-income year and choose to Tax Gain Harvest at 0%.

KlangFool

User avatar
Flobes
Posts: 1113
Joined: Tue Feb 16, 2010 12:40 am

Re: Is TLH in 12% bracket less worthwhile?

Post by Flobes » Tue Oct 23, 2018 11:20 am

Tax loss harvesting in the 12% bracket can be particularly advantageous when lowering your AGI (by up to $3000) makes you eligible for tax benefits like higher ACA subsidies, Savers credit, etc.

User avatar
BL
Posts: 9008
Joined: Sun Mar 01, 2009 2:28 pm

Re: Is TLH in 12% bracket less worthwhile?

Post by BL » Tue Oct 23, 2018 11:35 am

I did it once when I thought I was over the tax bracket.

If we never plan to sell, could just as well TLH.

User avatar
grabiner
Advisory Board
Posts: 24584
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Is TLH in 12% bracket less worthwhile?

Post by grabiner » Tue Oct 23, 2018 10:39 pm

mbasherp wrote:
Tue Oct 23, 2018 9:04 am
1) Am I correct that my September dividend from VTSAX might become nonqualified and taxed at 12% instead of 0% if I sell these shares I accumulated in the past 6 months?/
The rule is 61 days, not 6 months. If you sell tomorrow (10/24), any dividends on shares bought on or before 8/24 will be qualified.
2) I expect to be in the 22% bracket in the majority of future years. Does this make it less desirable to take losses now in the 12% bracket?

3) Even if I book maximum losses for one year (3k), at my 12% tax rate I'm only able to deduct $360. That's a far cry from the benefit the high income crowd seems to gain. Would you still go ahead?
If you harvest more than $3000, the remainder will carry over to future years in which you can deduct at 22%.

However, if you expect to sell the shares soon in a higher bracket, it is not worth harvesting now. You will have a $3000 capital loss this year deducted at 12%, and when you sell later, a $3000 capital gain taxed at 15%. This is only a net gain if your returns in the intervening time exceed 25%, which is the time required for a $360 investment this year to grow to $450.
Wiki David Grabiner

MrBeaver
Posts: 282
Joined: Tue Nov 14, 2017 4:45 pm

Re: Is TLH in 12% bracket less worthwhile?

Post by MrBeaver » Tue Oct 23, 2018 11:38 pm

adam1712 wrote:
Tue Oct 23, 2018 9:51 am
crit wrote:
Tue Oct 23, 2018 9:37 am
Can you also harvest some gains, and use the TLH to offset those gains, saving yourself capital gains tax later?
You should not use TLH to offset gains. The gains will already be taxed at 0% in the 12% tax bracket. In the 12% bracket you should try not to have capital gains and losses in the same year.
This is my understanding as well.

The one exception is if you know you will have some short-term gains (e.g. from an ESPP plan), then harvesting a similar amount of short-term losses can be beneficial.

crit
Posts: 477
Joined: Mon Jan 05, 2015 12:54 pm

Re: Is TLH in 12% bracket less worthwhile?

Post by crit » Wed Oct 24, 2018 7:48 am

Yes, I was incorrect. Thanks for pointing the correct answer out to the OP.

Topic Author
mbasherp
Posts: 211
Joined: Mon Jun 26, 2017 8:48 am

Re: Is TLH in 12% bracket less worthwhile?

Post by mbasherp » Wed Oct 24, 2018 7:59 am

grabiner wrote:
Tue Oct 23, 2018 10:39 pm

If you harvest more than $3000, the remainder will carry over to future years in which you can deduct at 22%.

However, if you expect to sell the shares soon in a higher bracket, it is not worth harvesting now. You will have a $3000 capital loss this year deducted at 12%, and when you sell later, a $3000 capital gain taxed at 15%. This is only a net gain if your returns in the intervening time exceed 25%, which is the time required for a $360 investment this year to grow to $450.
Thanks for the bringing such clarity to the table, Grabiner!

bsteiner
Posts: 4092
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Is TLH in 12% bracket less worthwhile?

Post by bsteiner » Wed Oct 24, 2018 8:27 am

If you're in a low bracket now, but expect to be in a higher bracket in future years, you might want to consider doing some Roth conversions to the extent you can do so in a low bracket.

2 bits
Posts: 82
Joined: Fri Jun 27, 2014 9:42 am

Re: Is TLH in 12% bracket less worthwhile?

Post by 2 bits » Wed Oct 24, 2018 8:48 am

bsteiner wrote:
Wed Oct 24, 2018 8:27 am
If you're in a low bracket now, but expect to be in a higher bracket in future years, you might want to consider doing some Roth conversions to the extent you can do so in a low bracket.
So would doing some TLH now allow for an additional $3K of conversions?
I know that the best answer is for me to put pencil to the forms and test with some tax filing software... but the conversation is right here this morning. So a quick answer will be appreciated but I will still also do my homework.

This year we have done some tax gain harvesting and I have been considering additional tgh or Roth conversions. I am considering which will be more advantageous through the next ten years when RMDs begin.
I sometimes think that I am living the life of which my immigrant ancestors dreamed.

User avatar
car733
Posts: 179
Joined: Sun Feb 25, 2018 10:07 am
Location: Chicago, IL

Re: Is TLH in 12% bracket less worthwhile?

Post by car733 » Wed Oct 24, 2018 9:09 am

OP, what's your reasoning to avoid doing it? The time spent doing it?

Topic Author
mbasherp
Posts: 211
Joined: Mon Jun 26, 2017 8:48 am

Re: Is TLH in 12% bracket less worthwhile?

Post by mbasherp » Wed Oct 24, 2018 9:44 am

car733 wrote:
Wed Oct 24, 2018 9:09 am
OP, what's your reasoning to avoid doing it? The time spent doing it?
Quite simply, I wanted to make sure that it's worthwhile over the long run. The math on what it might cost in the future (after doing TLH now) was a bit fuzzy and I appreciate the clarity that Bogleheads bring to the table.

Due to the relatively unique nature of my taxable account (opened with a lump sum on January 3, with monthly additions through the year so no large long term gains or losses) I've decided to wait to see if there are more significant losses available in coming days or weeks before acting. That's a purely arbitrary decision on my part. What would work out great is to take losses on the last trading day of the year and transfer funds over to our 2019 Roths on January 2nd. Then I won't be concerned with getting back out of VLCAX into VTSAX, because there will no longer be tax implications whenever I decide to switch back. But we'll see!

I also posted because most of the discussion around TLH seems to be folks in higher tax brackets, so I thought this conversation might be helpful to other middle class earners as well.

User avatar
LinusP
Posts: 154
Joined: Fri May 18, 2018 10:29 am

Re: Is TLH in 12% bracket less worthwhile?

Post by LinusP » Wed Oct 24, 2018 10:48 am

As stated in the notes of the wiki entry for Tax Gain Harvesting, tax loss harvesting following by tax gain harvesting essentially cancel each other out.

In my case, I'm trying to sell taxable Fund A so I can buy a lower-cost Vanguard fund, and I'm considering tax loss harvesting Fund B so I can sell more of Fund A this tax year. The TLH won't really help with taxes, but it will get more of Fund A sold, sooner. I'm okay with this, because I anticipate being in the 12% bracket next year and several years after, so I'll have plenty of room and time to TGH Fund B back from its low basis.

User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Is TLH in 12% bracket less worthwhile?

Post by Earl Lemongrab » Wed Oct 24, 2018 6:20 pm

adam1712 wrote:
Tue Oct 23, 2018 9:51 am
crit wrote:
Tue Oct 23, 2018 9:37 am
Can you also harvest some gains, and use the TLH to offset those gains, saving yourself capital gains tax later?
You should not use TLH to offset gains. The gains will already be taxed at 0% in the 12% tax bracket. In the 12% bracket you should try not to have capital gains and losses in the same year.
Not necessarily. I'm in the 12% bracket, but my qualified dividends already fill up the 0% space and more. Remember that long-term gains and QDIVs just float on top of ordinary income and are still progressive taxes. As you exceed the top end, you start paying the 15%.

User avatar
grabiner
Advisory Board
Posts: 24584
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Is TLH in 12% bracket less worthwhile?

Post by grabiner » Wed Oct 24, 2018 6:55 pm

LinusP wrote:
Wed Oct 24, 2018 10:48 am
As stated in the notes of the wiki entry for Tax Gain Harvesting, tax loss harvesting following by tax gain harvesting essentially cancel each other out.

In my case, I'm trying to sell taxable Fund A so I can buy a lower-cost Vanguard fund, and I'm considering tax loss harvesting Fund B so I can sell more of Fund A this tax year. The TLH won't really help with taxes, but it will get more of Fund A sold, sooner. I'm okay with this, because I anticipate being in the 12% bracket next year and several years after, so I'll have plenty of room and time to TGH Fund B back from its low basis.
In this situation, it makes sense to sell Fund A, and then sell enough of Fund B so that you can get down to the 12% tax bracket (where capital gains are tax-free). Additional sales of Fund B this year won't help you because they will offset untaxed capital gains, so you should wait until next year to sell, and sell then if you still have losses.
Wiki David Grabiner

JBTX
Posts: 5168
Joined: Wed Jul 26, 2017 12:46 pm

Re: Is TLH in 12% bracket less worthwhile?

Post by JBTX » Wed Oct 24, 2018 8:34 pm

If you tlh now you only get $360 at 12% (assuming you have no other capital gains)

If you expect your income to go up, you are likely to eventually pay cap gains taxes at greater than 12%. I can't see that it is worth the bother.

On the flip side, if you are at 0% cap gains rate, can you tax gain harvest some cap gains?

User avatar
LinusP
Posts: 154
Joined: Fri May 18, 2018 10:29 am

Re: Is TLH in 12% bracket less worthwhile?

Post by LinusP » Wed Oct 24, 2018 11:02 pm

grabiner wrote:
Wed Oct 24, 2018 6:55 pm
LinusP wrote:
Wed Oct 24, 2018 10:48 am
As stated in the notes of the wiki entry for Tax Gain Harvesting, tax loss harvesting following by tax gain harvesting essentially cancel each other out.

In my case, I'm trying to sell taxable Fund A so I can buy a lower-cost Vanguard fund, and I'm considering tax loss harvesting Fund B so I can sell more of Fund A this tax year. The TLH won't really help with taxes, but it will get more of Fund A sold, sooner. I'm okay with this, because I anticipate being in the 12% bracket next year and several years after, so I'll have plenty of room and time to TGH Fund B back from its low basis.
In this situation, it makes sense to sell Fund A, and then sell enough of Fund B so that you can get down to the 12% tax bracket (where capital gains are tax-free). Additional sales of Fund B this year won't help you because they will offset untaxed capital gains, so you should wait until next year to sell, and sell then if you still have losses.
I understand, but my situation is complicated by significant tax credits this year, and I didn't want to hijack this thread. See Taxes: Selling/gifting appreciated shares while taxes are low for details, if you're interested.

Post Reply