Tax Gain Harvesting Even w/State & Local Taxes?

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Que1999
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Joined: Mon May 30, 2016 10:27 am

Tax Gain Harvesting Even w/State & Local Taxes?

Post by Que1999 »

Thoughts on whether or not it makes sense to tax gain harvest within the 0% fed LTCG window even though approximately 10% State/local taxes would apply? I would have approximately $10k to $15k to harvest within the 0% fed window.
terran
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Re: Tax Gain Harvesting Even w/State & Local Taxes?

Post by terran »

I would say it depends on what you expect to happen to your tax rate in the future? When you plan to actually spend this money will you still be in a state/city with taxes that high or will you be in a lower/no tax state? If you'll pay that tax rate whether you sell now or later then I would do the gain harvesting, if you'll be in a no tax state in the future then I wouldn't, and if you'll be in a state with a lower tax then I'm not sure. This also assumes that you'll continue to be the 0% federal long term capital gains tax bracket. If you expect to pay 15% on federal long term capital gains when you want to spend the money then I would harvest now despite the state tax since 10% is less than 15%.

One thing to note just in case since it's kind of a common mistake: make sure you understand that capital gains are stacked on top of other income when figuring their tax rate. So only if your total income (earned, interest, dividends, capital gains) is under $12.4k+40k = $54.4k single or $24.8k+80k = $104.8k married will you be in the 0% LTCG tax bracket.
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Que1999
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Re: Tax Gain Harvesting Even w/State & Local Taxes?

Post by Que1999 »

terran wrote: Mon Sep 14, 2020 8:38 am I would say it depends on what you expect to happen to your tax rate in the future? When you plan to actually spend this money will you still be in a state/city with taxes that high or will you be in a lower/no tax state? If you'll pay that tax rate whether you sell now or later then I would do the gain harvesting, if you'll be in a no tax state in the future then I wouldn't, and if you'll be in a state with a lower tax then I'm not sure. This also assumes that you'll continue to be the 0% federal long term capital gains tax bracket. If you expect to pay 15% on federal long term capital gains when you want to spend the money then I would harvest now despite the state tax since 10% is less than 15%.

One thing to note just in case since it's kind of a common mistake: make sure you understand that capital gains are stacked on top of other income when figuring their tax rate. So only if your total income (earned, interest, dividends, capital gains) is under $12.4k+40k = $54.4k single or $24.8k+80k = $104.8k married will you be in the 0% LTCG tax bracket.
Well the plan is to relocate to a lower tax location for retirement in 2025. But with the eventual pension I will only be able to harvest probably $15-$20k in gains each year anyhow in retirement. So I will probably still be leaving many unrealized gains on the table, unable to harvest in those retirement years anyway...

That got me wondering if it would make more sense to take some gains off the table over the next 5 years, if and only if I can at least get some 0% out of the fed brackets, which I may be able to do since the wife recently retired and we are down to one household income. I am also considering moving from a City that imposes a 3.5% tax on LTCG/QD's, which would turn my 10% tax to 6.5% on those gains. In that case, I think it may be worth it to harvest gains and just pay the tax up to the 0% fed bracket. It may be overthinking, but unfortunately my brain does that sometimes... Thanks for the response.
terran
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Re: Tax Gain Harvesting Even w/State & Local Taxes?

Post by terran »

Agreed, I'd probably do some tax gain harvesting in those circumstances. It's not an exact science (too many variables) but try to leave enough gains to fill the 0% bracket in retirement when you plan to be in a lower tax state.
lakpr
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Re: Tax Gain Harvesting Even w/State & Local Taxes?

Post by lakpr »

The so-called "0% long term capital gains tax bracket" is also the same bracket where you are in 12% Federal bracket. I believe that we will not see a lower tax bracket than that in our lifetime again, once the TCJA expires at the end of 2025. For this reason, I strongly recommend Roth conversions (if you have any pre-tax balances) to fill up to $105k threshold (MFJ) than use it for tax-gain harvesting.

When you do tax-gain harvesting, you don't completely eliminate the taxes in the future. You still pay long term capital gains tax rate when you sell the shares (assuming there will be gains, and you held them more than 1 year, of course). Only one year's worth of gains escape Federal taxation. It's an ongoing problem. Instead, if you do have room for $10k to $15k, doing a Roth conversion means a Federal tax of $1200 to $1800; and in return, ALL future gains are tax-free.

Almost all states tax capital gains, long-term or short-term, as ordinary income; so it is a non-factor when choosing one over the other.

TL;DR: 0% bracket and Roth conversions compete in the same sandbox; I advise you to choose Roth conversions instead of tax-gain harvesting
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