Tax Gain Harvesting

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Topic Author
redmaw
Posts: 3
Joined: Mon Apr 22, 2019 7:20 am

Tax Gain Harvesting

Post by redmaw » Tue May 14, 2019 11:16 am

I am in the 12% bracket, and therefore have a 0% tax rate on capital gains. It seemed like a no brainer to me to sell anything that had long term gains in a taxable account and rebuy it just to reset the cost basis to a new higher value, and lower any future gains and potential taxes (possibly make TLH easier in the future, but at my current income that's not very advantageous). I read the wiki topic which points out I would owe state taxes now if I did that, which means this wouldn't be free as I originally assumed. So now I'm trying to decide if its worth it.

Details:
Married filling jointly
~90k income (after 401k/HSA witholdings)
Standard deduction results in ~66k taxable income + dividends and gains from taxable (was $3000 last year, i've since sold some bonds in this account)
~100k taxable account with ~10k gains mostly long term
Live in PA, which taxes capital gains as ordinary income at 3.07%
Spouse is currently stay at home, but may return to work in 5-7 years
I have no losses from previous years to cancel out

As I look at this I can take about 8-10k in gains and stay in the 0% bracket, which is 8-10k a won't have to pay taxes on at some unknown point in the future. This would cost about $300 in state taxes, and another say $50 in trading fees (spread across a few securities, a buy and sell for each). This seems like a decent deal to lock in the 0% rate, but there is a chance I will never pay taxes on gains in this account, if I am still in the 0% range when i make any actual withdraws. When withdraws will occur is up in the air, its intended for large unspecified future expenses (not necessarily retirement). If I withdraw after my spouse returns to work, it will likely be taxed at 15%. If we retire without spending any of it, it could be used to bridge the gap between retirement (hopefully early) and retirement age (pensions + SS + easy access to retirement account money) and may be taxed at 0%. It seems like either way it would be advantageous to be able to withdraw more money while creating less taxable income. If I assume 15% rate on 10k, I would save 1800 future dollars (1500 fed + 300 state assuming I stay in PA) for a cost of $350 now. The problem is I won't know if this is a good deal until years after the decision is made. So any input? Am I missing anything? Is this a good idea? If this isn't worth the time, is there any other way to "use up" the space between what I make and the top of the 0% bracket. It just seems like that is a gift I'm not taking advantage of.

As a secondary question, is there a good way to nail down what the dividend income for the year is before the year is over? I've only ever looked at the 1099, but it is issued in the following year.

JediMisty
Posts: 177
Joined: Tue Aug 07, 2018 7:06 am
Location: Central NJ

Re: Tax Gain Harvesting

Post by JediMisty » Tue May 14, 2019 11:37 am

redmaw wrote:
Tue May 14, 2019 11:16 am
I am in the 12% bracket, and therefore have a 0% tax rate on capital gains. It seemed like a no brainer to me to sell anything that had long term gains in a taxable account and rebuy it just to reset the cost basis to a new higher value, and lower any future gains and potential taxes (possibly make TLH easier in the future, but at my current income that's not very advantageous). I read the wiki topic which points out I would owe state taxes now if I did that, which means this wouldn't be free as I originally assumed. So now I'm trying to decide if its worth it.

Details:
Married filling jointly
~90k income (after 401k/HSA witholdings)
Standard deduction results in ~66k taxable income + dividends and gains from taxable (was $3000 last year, i've since sold some bonds in this account)
~100k taxable account with ~10k gains mostly long term
Live in PA, which taxes capital gains as ordinary income at 3.07%
Spouse is currently stay at home, but may return to work in 5-7 years
I have no losses from previous years to cancel out

As I look at this I can take about 8-10k in gains and stay in the 0% bracket, which is 8-10k a won't have to pay taxes on at some unknown point in the future. This would cost about $300 in state taxes, and another say $50 in trading fees (spread across a few securities, a buy and sell for each). This seems like a decent deal to lock in the 0% rate, but there is a chance I will never pay taxes on gains in this account, if I am still in the 0% range when i make any actual withdraws. When withdraws will occur is up in the air, its intended for large unspecified future expenses (not necessarily retirement). If I withdraw after my spouse returns to work, it will likely be taxed at 15%. If we retire without spending any of it, it could be used to bridge the gap between retirement (hopefully early) and retirement age (pensions + SS + easy access to retirement account money) and may be taxed at 0%. It seems like either way it would be advantageous to be able to withdraw more money while creating less taxable income. If I assume 15% rate on 10k, I would save 1800 future dollars (1500 fed + 300 state assuming I stay in PA) for a cost of $350 now. The problem is I won't know if this is a good deal until years after the decision is made. So any input? Am I missing anything? Is this a good idea? If this isn't worth the time, is there any other way to "use up" the space between what I make and the top of the 0% bracket. It just seems like that is a gift I'm not taking advantage of.

As a secondary question, is there a good way to nail down what the dividend income for the year is before the year is over? I've only ever looked at the 1099, but it is issued in the following year.
You have a good picture of the issue: while you are liable for state tax, do you want to utilize your 0% LTCG bracket? After all, you might never need that money from the taxable account, so it would be a shame to pay the PA state tax if you might pass it on to heirs... my preference would be to take the gain and pay the measly PA state tax. (I'm currently in the 7% NJ bracket, so 3.7% seems measly)

But, before you do that, I recommend you use your most current version of your preferred tax software for a "best estimate" of your bracket. I buy my copy of next year's Turbo Tax in December. I look for each of my taxable accounts funds to post their December dividends and capital gains, so that I can figure out what my income will be. I pair the total year's dividends/capital gains with my last paycheck information and run the numbers through the software. If you'll tell me the ticker of each of your taxable funds, I can look up the date they posted December earnings last year. I'm in a 24% bracket, so I did some TLH on December 28th to help me stay below the MAGI limit for Roth IRA contributions. Same idea. Next year (or whenever I retire), I'll be doing some tax gain harvesting of my 314k taxable accounts that have unrealized gains around 100k. But ever so carefully to stay in that coveted 0% LTCG bracket. BTW, the 12% and 24% income tax brackets nearly, but NOT EXACTLY correspond to the LTCG brackets of 0 and 15% respectively. (Using the 2018 software for 2019 will be close enough, if you prefer to wait until it goes on sale)

Watch out for bond funds that post their December earnings in January (VBTLX Vanguard total bond market fund comes to mind). The earnings will show up on your 1099 as for previous year even thought they post in January.

User avatar
LinusP
Posts: 120
Joined: Fri May 18, 2018 10:29 am

Re: Tax Gain Harvesting

Post by LinusP » Tue May 14, 2019 11:57 am

I'm in a fairly similar situation, though in California my tax rate is roughly twice yours. It seems to me like you're doing the numbers right; I'm looking forward to the feedback you get.
redmaw wrote:
Tue May 14, 2019 11:16 am
As a secondary question, is there a good way to nail down what the dividend income for the year is before the year is over? I've only ever looked at the 1099, but it is issued in the following year.
I sold significant taxable assets to move them to Vanguard last year, and managed to be very close to my target taxable income. I used the Excel 1040 spreadsheet to track dividends and capital gains over the course of the year, and pulled the trigger on December 21st (a little luck there, being on the second-lowest day in the market). I don't know which brokerage you use, but Vanguard estimates upcoming distributions several weeks ahead of time (filter on the Fund News topic from their News & Views page); I imagine the other brokerages do something similar. You can also look at distributions for the last several years, though they do vary some.

One trick I used was to use Vanguard's equivalent ETF to estimate the closing price of my Vanguard mutual funds during the last hour of the trading day. Especially when markets make big moves (which can be good days to trade), it helps to take this into account.

User avatar
BL
Posts: 8880
Joined: Sun Mar 01, 2009 2:28 pm

Re: Tax Gain Harvesting

Post by BL » Tue May 14, 2019 12:08 pm

Yes, tax gain harvest could be a decent idea. But I see a hint that it could be used for money-saving purchases of ETFs or mutual funds with no trading fees and low-ERs (expense ratios), and perhaps improving portfolio to make it tax-efficient and low-cost.

Have you read any recommended books from the Wiki? Here is a quick read free pdf for a newer investor, but a good review for all of us:
https://www.etf.com/docs/IfYouCan.pdf

northtexan
Posts: 175
Joined: Mon Jul 11, 2016 8:11 pm

Re: Tax Gain Harvesting

Post by northtexan » Tue May 14, 2019 12:31 pm

redmaw wrote:
Tue May 14, 2019 11:16 am
I am in the 12% bracket, and therefore have a 0% tax rate on capital gains. It seemed like a no brainer to me to sell anything that had long term gains in a taxable account and rebuy it just to reset the cost basis to a new higher value, and lower any future gains and potential taxes (possibly make TLH easier in the future, but at my current income that's not very advantageous). I read the wiki topic which points out I would owe state taxes now if I did that, which means this wouldn't be free as I originally assumed. So now I'm trying to decide if its worth it.

Details:
Married filling jointly
~90k income (after 401k/HSA witholdings)
Standard deduction results in ~66k taxable income + dividends and gains from taxable (was $3000 last year, i've since sold some bonds in this account)
~100k taxable account with ~10k gains mostly long term
Live in PA, which taxes capital gains as ordinary income at 3.07%
Spouse is currently stay at home, but may return to work in 5-7 years
I have no losses from previous years to cancel out

As I look at this I can take about 8-10k in gains and stay in the 0% bracket, which is 8-10k a won't have to pay taxes on at some unknown point in the future. This would cost about $300 in state taxes, and another say $50 in trading fees (spread across a few securities, a buy and sell for each). This seems like a decent deal to lock in the 0% rate, but there is a chance I will never pay taxes on gains in this account, if I am still in the 0% range when i make any actual withdraws. When withdraws will occur is up in the air, its intended for large unspecified future expenses (not necessarily retirement). If I withdraw after my spouse returns to work, it will likely be taxed at 15%. If we retire without spending any of it, it could be used to bridge the gap between retirement (hopefully early) and retirement age (pensions + SS + easy access to retirement account money) and may be taxed at 0%. It seems like either way it would be advantageous to be able to withdraw more money while creating less taxable income. If I assume 15% rate on 10k, I would save 1800 future dollars (1500 fed + 300 state assuming I stay in PA) for a cost of $350 now. The problem is I won't know if this is a good deal until years after the decision is made. So any input? Am I missing anything? Is this a good idea? If this isn't worth the time, is there any other way to "use up" the space between what I make and the top of the 0% bracket. It just seems like that is a gift I'm not taking advantage of.

As a secondary question, is there a good way to nail down what the dividend income for the year is before the year is over? I've only ever looked at the 1099, but it is issued in the following year.
I am in a similar situation as you but without state income tax. I love to harvest gains and I wish I did so before last week started, I was thinking about it screwed that up. But one other benefit is that your cost basis is higher so your future gain are less and wont be taxed as much, and you will be able to tax loss harvest if you were to realize the gains and then have a big drop like last week. I would think it is a good deal to pay the low taxes if you plan on being over the tax bracket in the near future. Even if you are not I would harvest them so I can potentially benefit from tax loss harvesting.

Depending on which company you use to manage you portfolio they should tell you the dividends you have received. It might be reported on their differently if they are reinvested.

User avatar
Svensk Anga
Posts: 522
Joined: Sun Dec 23, 2012 5:16 pm

Re: Tax Gain Harvesting

Post by Svensk Anga » Tue May 14, 2019 8:14 pm

If you were to tax gain harvest your funds now, this could give you a source of lightly taxed funds to cover living expenses in early retirement. This in turn will free up bracket space for low tax cost Roth conversions. When you get closer to retirement it will be clearer if Roth conversions might be advantageous. It sounds like it is too uncertain to justify Roth conversions now to fill up that bracket space.

Paying that state tax now might allow you to get some of your tax-deferred money out at 12% rather than 22% (or 25% if the present brackets sunset as per current law). It may also save you from some of the awful marginal rates (not brackets) that occur as taxation of SS phases in.

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