Why isn't tax gain harvesting suggested more often?

[fortfun]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

[samsoes]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

How would you not pay income tax on the TGH gain amount?

[randomguy]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

How would you not pay income tax on the TGH gain amount?

Be in the 0% bracket and live in a state that doeant tax gains. I assume we dont hear about it much because few people meet both of those requirements.

[deltaneutral83]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

30 year rates were about 7%-ish from 1998-2002. Check out what the S&P has done since then. And we are a lot further out than 5 years.

[fortfun]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

How would you not pay income tax on the TGH gain amount?

Be in the 0% bracket and live in a state that doeant tax gains. I assume we dont hear about it much because few people meet both of those requirements.

For 2018, a couple can have up to $77,200 in taxable income (add on the $24,000 standard deduction, and it's over $100,000) to snag the zero-percent capital gains rate. If the couple is maxing: 401Ks, 457, 403bs, defined contributions, HSA, etc., this is quite possible.

[fortfun]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

30 year rates were about 7%-ish from 1998-2002. Check out what the S&P has done since then. And we are a lot further out than 5 years.

Well, I'm assuming people either refinanced or took out a new loan at a 3-4% range.

[fortfun]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

How would you not pay income tax on the TGH gain amount?

For 2018, a couple can have up to $77,200 in taxable income (add on the $24,000 standard deduction, and it's over $100,000) to snag the zero-percent capital gains rate. If the couple is maxing: 401Ks, 457, 403bs, defined contributions, HSA, etc., this is quite possible.

[deltaneutral83]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

30 year rates were about 7%-ish from 1998-2002. Check out what the S&P has done since then. And we are a lot further out than 5 years.

Well, I'm assuming people either refinanced or took out a new loan at a 3-4% range.

You're probably correct but the amount of finance acumen and attention this requires is not to be discounted in my opinion.

[fortfun]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

30 year rates were about 7%-ish from 1998-2002. Check out what the S&P has done since then. And we are a lot further out than 5 years.

Well, I'm assuming people either refinanced or took out a new loan at a 3-4% range.

You're probably correct but the amount of finance acumen and attention this requires is not to be discounted in my opinion.

True, I've just been on the fence a while now and it seems that TGH might be the tie breaker for me. It was a concept that I wasn't familiar with until recently. I think I'm going to put my extra cash in a Vanguard Total Index fund and see what happens over the next 10 years. If there are some years with gains, I'll TGH. Of course, we are only in the position to do this because we have so much pre-tax room available to us (401Ks, 403b, 457s, HSA, etc.)

[Riley15]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

For 2018, a couple can have up to $77,200 in taxable income (add on the $24,000 standard deduction, and it's over $100,000) to snag the zero-percent capital gains rate. If the couple is maxing: 401Ks, 457, 403bs, defined contributions, HSA, etc., this is quite possible.

I am not following how TGH would help into getting a Mortgage Interest Deduction?

I believe the way it works is your Taxable Income + your Capital Gains have to be below $77,200 in order to be in the zero-percent capital gains rate. So you may only be able to TGH a smaller amount if your income comes close to the limit.

[Earl Lemongrab]

In my case, even though in the 12% ordinary income bracket, I have no 0% CG space. That's because it's all filled with qualified dividends. That will be a problem for many with substantial taxable stock holdings.

[randomguy]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

How would you not pay income tax on the TGH gain amount?

Be in the 0% bracket and live in a state that doeant tax gains. I assume we dont hear about it much because few people meet both of those requirements.

For 2018, a couple can have up to $77,200 in taxable income (add on the $24,000 standard deduction, and it's over $100,000) to snag the zero-percent capital gains rate. If the couple is maxing: 401Ks, 457, 403bs, defined contributions, HSA, etc., this is quite possible.

And you live in one of about 7 states (can't remember if capital gains are taxed in a couple or just dividends). And be in position where added income doesn't hurt (ACA, SS taxation, savers tax credit,...). And have taxable accounts (i.e. if your making 100k/year odds are you can do most of your savings in tax advantaged accounts). It is definitely possible but I am not sure it is a huge group where I would expect to see lots of posts.

[FoolMeOnce]

As for TGH's relation to the mortgage interest deduction, I'd think most people with a mortgage large enough to have enough interest to lead to a lot of added value itemizing versus taking the standard deduction are also earning too much to have any 0% LTCG space left.

[fortfun]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

For 2018, a couple can have up to $77,200 in taxable income (add on the $24,000 standard deduction, and it's over $100,000) to snag the zero-percent capital gains rate. If the couple is maxing: 401Ks, 457, 403bs, defined contributions, HSA, etc., this is quite possible.

I am not following how TGH would help into getting a Mortgage Interest Deduction?

I believe the way it works is your Taxable Income + your Capital Gains have to be below $77,200 in order to be in the zero-percent capital gains rate. So you may only be able to TGH a smaller amount if your income comes close to the limit.

I mean by keeping your mortgage you can keep the interest deduction. Yes, with the 24k standard deduction (maybe more with itemized), it's actually over 100k.

[fortfun]

As for TGH's relation to the mortgage interest deduction, I'd think most people with a mortgage large enough to have enough interest to lead to a lot of added value itemizing versus taking the standard deduction are also earning too much to have any 0% LTCG space left.

Good point. That may not be a benefit, in that case. Last year, we came out just a bit ahead by itemizing. Not sure that will be the case this year...

[UpsetRaptor]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

For 2018, a couple can have up to $77,200 in taxable income (add on the $24,000 standard deduction, and it's over $100,000) to snag the zero-percent capital gains rate. If the couple is maxing: 401Ks, 457, 403bs, defined contributions, HSA, etc., this is quite possible.

I am not following how TGH would help into getting a Mortgage Interest Deduction?

I believe the way it works is your Taxable Income + your Capital Gains have to be below $77,200 in order to be in the zero-percent capital gains rate. So you may only be able to TGH a smaller amount if your income comes close to the limit.

I mean by keeping your mortgage you can keep the interest deduction. Yes, with the 24k standard deduction (maybe more with itemized), it's actually over 100k.

In order to get the mortgage interest deduction, you'd have to itemize. Our combined AGI, after all tax deferralls, was ~$150K, in a state with an income tax for SALT, with a pretty hefty mortgage and some donations, and it still worked out best for us to just take the standard deduction in 2018. What you're suggesting may be possible for some but that's just a tough needle to thread - enough income and mortgage to warrant itemizing, but still small enough to be able to TGH. If it works for you, great.

[WildBill]

Howdy

Interesting question.

Tax gain harvesting is useful to avoid future capital gains tax on securities sales, and also a way of creating liquidity with zero tax from security sales. For this to be useful you have to be in a zero effective bracket. I can see it would be very useful for a retiree or a low earner with space to do it.

Tax loss harvesting creates a loss that can be written off against taxes and can also create liquidity, or allows reinvestment at a lower basis. Useful to anyone regardless of taxable income and tax bracket.

I guess tax loss harvesting gets more press here because most folks are relatively high earners, even the retirees, with a focus on tax avoidance. Tax loss harvesting also gives them the ability to create future zero-tax liquidity through selling appreciated securities. Most of the retirees are also probably more interested in Roth conversions than tax gain harvesting.

Happy tax avoidance,whatever flavor you choose.

W B

[UpsetRaptor]

Duplicate post

[UpsetRaptor]

Howdy

Interesting question.

Tax gain harvesting is useful to avoid future capital gains tax on securities sales, and also a way of creating liquidity with zero tax from security sales. For this to be useful you have to be in a zero effective bracket. I can see it would be very useful for a retiree or a low earner with space to do it.

Tax loss harvesting creates a loss that can be written off against taxes and can also create liquidity, or allows reinvestment at a lower basis. Useful to anyone regardless of taxable income and tax bracket.

I guess tax loss harvesting gets more press here because most folks are relatively high earners, even the retirees, with a focus on tax avoidance. Tax loss harvesting also gives them the ability to create future zero-tax liquidity through selling appreciated securities. Most of the retirees are also probably more interested in Roth conversions than tax gain harvesting.

Happy tax avoidance,whatever flavor you choose.

W B

Here's the 2018 income brackets for 0% cap gains rate:
MFJ: $0 to $77,200
Single: $0 to $38,600

Even after accounting for the standard deduction, many Bogleheads probably don't find themselves in that situation until they retire. If that happens before SS+RMDs and there are some low AGI years where it could be considered, then the question often becomes TGH or Roth conversions? You do see those threads sometimes.

[jmk]

I think it's mostly just the high-income folks who tend to post here. As a working class person not raised with a finance background, learning about TGH was actually what moved me into serious investing. Prior I was storing most of stocks in my IRAs and had plenty of taxable CDs and savings. Then I read about the 0% capital gains rate. Investing in stocks in taxable became a no-brainier at that point, especially when I've been laid off or otherwise had especially low income. I still think it's unfair that I pay 0% on capital gains when I'm wealthy enough to buy equity.

[Grasshopper]

My name is Grasshopper and I TGH, Background retired on SS no pension I take $40K to 50k TGH every year.I also do a little Roth conversions every year too. The way I look at it with SS and RMD's in a couple of years if I want/need to take some LTCG's that I may taking them at a lot more than 0%. I have no one but Ms G to leave the bank roll to, so I have been spending buckets of money on travel. Now about that fly around the world on a private jetliner.

[Que1999]

If your mortgage interest is still deductible and gives you a better return than the new standard deduction, AND you qualify for 0% capital gains when gain harvesting.... Then yeah, absolutely go that route instead of paying down the mortgage. But not everyone can go that route. My mortgage interest went from being deductible to zero deductibility overnight... And income is too high to tax-gain harvest... Probably ever with the eventual pension income...

It seems that capital gain harvesting is a technique of the early-retired for the most part tho since you're income has to be relatively low in order to take advantage of it. But it seems like an amazing way to maximize tax-avoidance if you can swing it. This is a great article that opened my eyes to the wonders of tax-gain harvesting a few years back...

https://www.gocurrycracker.com/never-pay-taxes-again/

[Nate79]

Most people who are in the accumulation phase either have taxable accounts and too high of income for this to make sense or have low income but no taxable account. To max out tax advantage accounts and have money for taxable accounts requires a decent amount of income.

[fortfun]

Most people who are in the accumulation phase either have taxable accounts and too high of income for this to make sense or have low income but no taxable account. To max out tax advantage accounts and have money for taxable accounts requires a decent amount of income.

Unless you oversaved cash and have too much in a 2.2% savings account, like we do at the moment. Won't happen in the future, but it is a problem I need to deal with now.

[fortfun]

If your mortgage interest is still deductible and gives you a better return than the new standard deduction, AND you qualify for 0% capital gains when gain harvesting.... Then yeah, absolutely go that route instead of paying down the mortgage. But not everyone can go that route. My mortgage interest went from being deductible to zero deductibility overnight... And income is too high to tax-gain harvest... Probably ever with the eventual pension income...

It seems that capital gain harvesting is a technique of the early-retired for the most part tho since you're income has to be relatively low in order to take advantage of it. But it seems like an amazing way to maximize tax-avoidance if you can swing it. This is a great article that opened my eyes to the wonders of tax-gain harvesting a few years back...

https://www.gocurrycracker.com/never-pay-taxes-again/

Thanks for sharing this article. I'll read it tonight.

[fortfun]

I think it's mostly just the high-income folks who tend to post here. As a working class person not raised with a finance background, learning about TGH was actually what moved me into serious investing. Prior I was storing most of stocks in my IRAs and had plenty of taxable CDs and savings. Then I read about the 0% capital gains rate. Investing in stocks in taxable became a no-brainier at that point, especially when I've been laid off or otherwise had especially low income. I still think it's unfair that I pay 0% on capital gains when I'm wealthy enough to buy equity.

I agree. I think a lot of teachers could probably TGH, even while working full time. I wish I had known about TGH a long time ago.

[Nestegg_User]

I know I've mentioned TGH in recent posts.... earlier retirement years for us, haven't started SS but have pension... it's a way to get tax free gains right now (most all TLH already occurred) and it's nominally better right now versus Roth conversions (0% / 12% versus 12%/22%) and still allows future conversions (if desired) instead of losing the zero rate (which I cannot get back to after starting SS). As it is, we won't be able to convert all the tIRA to Roth at favorable conditions....so we take what we can at the lower rates).
(couldn't convert when working since we were at 33+% rates then, with fed taxes alone in the forty K range.... now fed taxes are minuscule in retirement)

[Earl Lemongrab]

Another thing people run into is carry-over capital losses. Even if you're in the 0% CG bracket, any gains will eat up the losses and they won't be there later for taking against ordinary income.

[samsoes]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

How would you not pay income tax on the TGH gain amount?

For 2018, a couple can have up to $77,200 in taxable income (add on the $24,000 standard deduction, and it's over $100,000) to snag the zero-percent capital gains rate. If the couple is maxing: 401Ks, 457, 403bs, defined contributions, HSA, etc., this is quite possible.

Oh, I see. The fact that this applies to you was not in your original post. It is worded such that it is a universal truth.

Clarity counts.

Happy Friday!

[samsoes]

Duplicate

[PaddyMac]

Being semi-retired (we have income to save in retirement accounts but also need to live off some savings), we keep a careful eye on cap gains. It's a real balancing act. It used to be an easy decision to sell stocks from brokerage and move them into our HSA or Roth IRAs or Roth 401k - we'd pay no extra tax and they are tax free going forward. But now that we are approaching the ACA "cliff" and we get the S199A business deduction, I'm finding that too much cap gains does have an impact. We also managed to get the Tax Saver's credit last year, but we were just under the cliff by a few dollars. So it's not as easy a calculation as just looking at your tax bracket.

[fortfun]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH? It seems it would give you three benefits:

1. Mortgage interest deduction
2. Higher returns (over the long run, if you can hold for 5+ years)
3. Not paying income tax on the TGH amount

How would you not pay income tax on the TGH gain amount?

For 2018, a couple can have up to $77,200 in taxable income (add on the $24,000 standard deduction, and it's over $100,000) to snag the zero-percent capital gains rate. If the couple is maxing: 401Ks, 457, 403bs, defined contributions, HSA, etc., this is quite possible.

Oh, I see. The fact that this applies to you was not in your original post. It is worded such that it is a universal truth.

Clarity counts.

Happy Friday!

Apparently, others are doing it too
https://www.gocurrycracker.com/never-pay-taxes-again/

[harvestbook]

My state (North Carolina) taxes long-term capital gains and short-term capital gains (and all income) at 5.25 percent, with only a $17,500 deductible for MFJ. It can still be a bargain since that money will be taxed eventually anyway, but it's less of a no-brainer. Like Paddymac we used to sell some to fill up tax-deferred buckets, and I wasted some space last year because of so many moving parts, but this is our first year of ACA so I'm going to be pretty conservative until I see how the end of the year is looking. Good tool to have around, though.

[grabiner]

In the debate of whether to pay off mortgage early, why isn't after tax investing, with tax gain harvesting, suggested more often (instead of paying off mortgage early)? Do most people just make too much money for TGH?

Very few people who are considering paying off a mortgage early make enough for tax gain harvesting to be a reasonable move. Usually, if you are in the 12% tax bracket and have extra money, you aren't maxing out your 401(k) or IRA, and maxing those out (preferably as Roth) is a better deal than paying down your mortgage. (And if you are considering tax gain harvesting, you can sell your taxable stock to make the 401(k) contributions.)