I need to rebalance, but hate paying capital gains tax.

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fredflinstone
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I need to rebalance, but hate paying capital gains tax.

Post by fredflinstone » Fri Nov 15, 2019 12:28 pm

I just checked my asset allocation for the first time in a long time. I am significantly higher in stocks than I'm supposed to be. I have made all the changes I can in my tax-deferred accounts, but am still overweight stocks. At this point, I assume I should just sell stocks in my taxable account, even though doing so will trigger capital gains taxes. Have I got that right?

Also, I can't harvest significant capital losses.

sjt
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Re: I need to rebalance, but hate paying capital gains tax.

Post by sjt » Fri Nov 15, 2019 12:33 pm

Might be easier to change your targeted asset allocation. Just set it to whatever your current allocation is and you're all set!
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

Small Savanna
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Re: I need to rebalance, but hate paying capital gains tax.

Post by Small Savanna » Fri Nov 15, 2019 12:35 pm

The easiest way to totally avoid capital gains in a taxable account is to take advantage of the step-up in basis when you die... My guess is that capital gains rates are about as low as they ever will be, so splitting the gain between 2019 and 2020 may end up saving you money in future years.

sport
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Re: I need to rebalance, but hate paying capital gains tax.

Post by sport » Fri Nov 15, 2019 12:35 pm

If you don't rebalance, how will you feel if/when the market takes a big drop and you lose more than you are willing to lose? There is an old maxim about this: "Don't let the tax tail wag the dog."

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Re: I need to rebalance, but hate paying capital gains tax.

Post by surfstar » Fri Nov 15, 2019 12:49 pm

Are you accumulating? Drawing down?
You could invest new monies into bonds, or sell stocks for spending money.

If the market drops, will you be needing to sell for spending money at that point? If not, less of a reason to sell now and incur a known tax.

anon_investor
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Re: I need to rebalance, but hate paying capital gains tax.

Post by anon_investor » Fri Nov 15, 2019 12:52 pm

sjt wrote:
Fri Nov 15, 2019 12:33 pm
Might be easier to change your targeted asset allocation. Just set it to whatever your current allocation is and you're all set!
:sharebeer

StealthRabbit
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Re: I need to rebalance, but hate paying capital gains tax.

Post by StealthRabbit » Fri Nov 15, 2019 12:58 pm

1) Selectively sell appreciated assets (cost basis specific)
2) Direct your appreciated assets to your DAF (set up and fund your future benevolent gifting strategy)
3) Offset profits with 'other' investment expenses (I keep Commercial income properties around for just that reason)
4) Buy a future business asset (Sect 179 accelerated depreciation)
5) Fully fund any credits (Tira / HSA / any others listed on Credit side of 1040)
6) Pre-Pay any deductible expenses (as allowed) in a high tax yr.

7+)...

Pay required taxes...
Last edited by StealthRabbit on Fri Nov 15, 2019 1:00 pm, edited 1 time in total.

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fredflinstone
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Re: I need to rebalance, but hate paying capital gains tax.

Post by fredflinstone » Fri Nov 15, 2019 1:00 pm

ok, got it. I'll suck it up. Thanks everyone.

carmonkie
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Re: I need to rebalance, but hate paying capital gains tax.

Post by carmonkie » Fri Nov 15, 2019 1:00 pm

How far off are you? What about changing your 401(k) contribution to 100% Bonds. Is your 401(k) all Bonds already?
There would not be anything wrong if that was the case, you want slow growth assets like Bonds in 401(k).

mmcmonster
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Re: I need to rebalance, but hate paying capital gains tax.

Post by mmcmonster » Fri Nov 15, 2019 1:07 pm

surfstar wrote:
Fri Nov 15, 2019 12:49 pm
Are you accumulating? Drawing down?
You could invest new monies into bonds, or sell stocks for spending money.

If the market drops, will you be needing to sell for spending money at that point? If not, less of a reason to sell now and incur a known tax.
This is the way I see it.

I'm still in the accumulation phase. Adding money every month to keep my asset allocation as close to my target percentage as possible. Just takes a few seconds of mental math to figure out where new money goes.

Should be just as easy in distribution phase.

And if it takes a few months ... why worry?

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Re: I need to rebalance, but hate paying capital gains tax.

Post by hirlaw » Fri Nov 15, 2019 2:31 pm

Small Savanna wrote:
Fri Nov 15, 2019 12:35 pm
The easiest way to totally avoid capital gains in a taxable account is to take advantage of the step-up in basis when you die...
I think I would rather take the capital gains hit! :D

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tadamsmar
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Re: I need to rebalance, but hate paying capital gains tax.

Post by tadamsmar » Fri Nov 15, 2019 2:53 pm

I think you could do a kind of virtual rebalancing by making an allocation an inverse fund:

https://www.investopedia.com/investing/ ... rket-etfs/

You would allocation some money in a Roth or tax-deferred account, thereby avoiding taxes.

I don't know of anyone doing this, but it seems to me to make sense in principle. One problem might be higher ERs on these funds +.085. Maybe that wipes out any upside to this strategy. Not sure if there are any with lower ERs.

RubyTuesday
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Re: I need to rebalance, but hate paying capital gains tax.

Post by RubyTuesday » Fri Nov 15, 2019 3:09 pm

fredflinstone wrote:
Fri Nov 15, 2019 12:28 pm
I just checked my asset allocation for the first time in a long time. I am significantly higher in stocks than I'm supposed to be. I have made all the changes I can in my tax-deferred accounts, but am still overweight stocks. At this point, I assume I should just sell stocks in my taxable account, even though doing so will trigger capital gains taxes. Have I got that right?

Also, I can't harvest significant capital losses.
If you haven’t you could make sure stock dividends are not reinvested and use that money to rebalance. Even though stock prices have risen substantially, bonds have likely been up even without reinvestment. That helps me stay closer to my desired allocation.

reginekierkegaard
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Re: I need to rebalance, but hate paying capital gains tax.

Post by reginekierkegaard » Fri Nov 15, 2019 3:16 pm

mmcmonster wrote:
Fri Nov 15, 2019 1:07 pm
surfstar wrote:
Fri Nov 15, 2019 12:49 pm
Are you accumulating? Drawing down?
You could invest new monies into bonds, or sell stocks for spending money.

If the market drops, will you be needing to sell for spending money at that point? If not, less of a reason to sell now and incur a known tax.
This is the way I see it.

I'm still in the accumulation phase. Adding money every month to keep my asset allocation as close to my target percentage as possible. Just takes a few seconds of mental math to figure out where new money goes.

Should be just as easy in distribution phase.

And if it takes a few months ... why worry?
I have been doing exactly that. The US stocks and REITs had outperformed the International and Bonds.
It is beginning to eat into my 'dry powder' as I needed more cash to rebalance than I could save per month.
On the other hand, it is rather concerning that the US is the only market that is at all time high while Europe, Asia Pacific and the Emerging markets are struggling.
I am also worry that the Fed is cutting rate and loosening their monetary policy while the economy is good and unemployment at all time low.

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John151
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Re: I need to rebalance, but hate paying capital gains tax.

Post by John151 » Fri Nov 15, 2019 3:54 pm

I’m in a similar situation as the original poster. In my case, my stock allocation is five percentage points above where I’d like it to be, all of that is in taxable accounts, and rebalancing would trigger a hefty capital gains tax.

Fortunately I’m retired, I have a nice pension, and I have enough in bonds to see me through to the end of my days. I don’t think I’ll ever need to sell stocks to cover my expenses. In fact, my stocks could crash to zero without affecting my lifestyle in the slightest. So I decided not to rebalance my stocks. Why sell stocks and pay capital gains taxes when I don’t need to?

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Re: I need to rebalance, but hate paying capital gains tax.

Post by stocknoob4111 » Fri Nov 15, 2019 4:01 pm

I don't rebalance, there are many experts (including Bogle himself in an interview I saw) that do not recommend it if you are ok with the new risk profile. Bogle and others stated that if you don't rebalance you can do better in many cases and I see that when I backtest actual data, in many cases NOT rebalancing results in a bigger balance.

I personally would not pay capital gains taxes as that is capital that is lost and could be growing in your portfolio, I have a hard time believing you will come out ahead paying taxes to gain some rebalancing benefit... most likely you will be worse off. And to add that taxes in places like where I am (California) are astronomical because capital gains are taxed as income.

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celia
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Re: I need to rebalance, but hate paying capital gains tax.

Post by celia » Fri Nov 15, 2019 4:23 pm

If you are still contributing to any accounts, those contributions could go 100% to whatever you are under-allocated. Your dividends can also go there. Many/most funds will be paying dividends in December.

In addition, you can re-allocate in any retirement accounts/ IRAs without incurring capital gains (although it is a shame to hold bonds in a Roth since you want to maximize your tax-free growth).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by GerryL » Fri Nov 15, 2019 4:32 pm

This is why my taxable account is in a balanced fund that mirrors my AA. Well, 60/40 stock/bond, not including international. But that way I am able to do any needed rebalancing in tax-advantaged space.

To be honest, I didn't know enough to think about the tax consequences when I made this decision years ago. I just figured it would be easier to have a single fund that reflected my desired AA.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by mailman781 » Fri Nov 15, 2019 4:32 pm

I probably should not post this because I know there will be a lot flak,but here goes.

One way not to have to rebalance and pay capital gains is to use balanced funds so that you do not have to rebalance. It will cost you a little more in tax because of the bonds, but I like the piece of mind of not having to rebalance and knowing that if I pass, my wife will not have that worry. She is just not interested in investing. Yes, I know that most will disagree.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by bertilak » Fri Nov 15, 2019 4:35 pm

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Re: I need to rebalance, but hate paying capital gains tax.

Post by milktoast » Fri Nov 15, 2019 4:35 pm

I'm assuming you are accumulating.

Stop dividend reinvestments. Place dividends and new contributions in bonds.

If you are outside the rebalance threshold, sell your highest basis long term shares to pull you just under the threshold. For instance, if you have a 60/40 portfolio with 5% bands, don't correct from 68/32 to 60/40. Instead correct to 65/35.

Or just take profits and pay the tax.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by Hockey10 » Fri Nov 15, 2019 5:04 pm

Gift some stock to Pebbles and Bam-Bam.

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tadamsmar
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Re: I need to rebalance, but hate paying capital gains tax.

Post by tadamsmar » Fri Nov 15, 2019 5:25 pm

Roth conversions where you use taxable withdrawals to cover the taxes can be a way to address this. But overall the Roth conversions have to be possible and make sense for you.
Last edited by tadamsmar on Sat Nov 16, 2019 9:15 am, edited 1 time in total.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by tadamsmar » Fri Nov 15, 2019 5:31 pm

mailman781 wrote:
Fri Nov 15, 2019 4:32 pm
I probably should not post this because I know there will be a lot flak,but here goes.

One way not to have to rebalance and pay capital gains is to use balanced funds so that you do not have to rebalance. It will cost you a little more in tax because of the bonds, but I like the piece of mind of not having to rebalance and knowing that if I pass, my wife will not have that worry. She is just not interested in investing. Yes, I know that most will disagree.
Rick Ferri is an advocate for your approach:

https://www.forbes.com/sites/rickferri/ ... 8d98e4711b

InvestingGeek
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Re: I need to rebalance, but hate paying capital gains tax.

Post by InvestingGeek » Fri Nov 15, 2019 5:34 pm

If you're still accumulating, it's a no-brainer - just start allocating everything to the underfunded category and rebalance over time without tax consequences.

If you're retired, depending on how comfortable you are with the deviation, I would just bite the bullet and rebalance. There's a reason for the decided AA. If you aren't comfortable with too much in stocks, then better to offload them instead of staying awake at night worrying about a crash and not having enough in bonds.
Last edited by InvestingGeek on Fri Nov 15, 2019 5:42 pm, edited 2 times in total.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by InvestingGeek » Fri Nov 15, 2019 5:36 pm

Another strategy I use is to donate appreciated stock by transferring to a donor advised fund. You can donate the capital gains without any tax liability. And in fact, it benefits your taxes by letting you itemize for that year by taking the full amount as a charitable deduction.

You can then make donations to charities of your choice anytime in future from that fund. Much better than donating cash.
Last edited by InvestingGeek on Fri Nov 15, 2019 6:32 pm, edited 2 times in total.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by InvestingGeek » Fri Nov 15, 2019 5:41 pm

mailman781 wrote:
Fri Nov 15, 2019 4:32 pm
I probably should not post this because I know there will be a lot flak,but here goes.

One way not to have to rebalance and pay capital gains is to use balanced funds so that you do not have to rebalance. It will cost you a little more in tax because of the bonds, but I like the piece of mind of not having to rebalance and knowing that if I pass, my wife will not have that worry. She is just not interested in investing. Yes, I know that most will disagree.
My issue with this is the higher expense ratio, and my asset allocation needs changing as I near retirement.

InvestingGeek
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Re: I need to rebalance, but hate paying capital gains tax.

Post by InvestingGeek » Fri Nov 15, 2019 5:44 pm

Another option: wait for the market to rebalance you automatically :twisted:

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Re: I need to rebalance, but hate paying capital gains tax.

Post by TN_Boy » Fri Nov 15, 2019 5:52 pm

fredflinstone wrote:
Fri Nov 15, 2019 12:28 pm
I just checked my asset allocation for the first time in a long time. I am significantly higher in stocks than I'm supposed to be. I have made all the changes I can in my tax-deferred accounts, but am still overweight stocks. At this point, I assume I should just sell stocks in my taxable account, even though doing so will trigger capital gains taxes. Have I got that right?

Also, I can't harvest significant capital losses.
Well, if you went a year or two with all contributions directed to bonds, how far off would you be then?

Also, you could look at your tax lots and perhaps sell the highest cost without excessive pain?

"Significantly higher" doesn't provide much information. Did you want to be 50-50 but are now 60-40? Or something really dramatic like you wanted 50-50 and are now 90-10?

I'd be reluctant to take a big capital gains hit also. Unless I was significantly far off, I'd live with redirecting future contributions.

Incidentally, your situation is a reason I hadn't thought of for looking at the portfolio more often; as your asset allocation drifts, you can redirect future contributions to slow the drift down. This has less value for a late stage accumulator, but might have helped a bit.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by inbox788 » Fri Nov 15, 2019 6:12 pm

fredflinstone wrote:
Fri Nov 15, 2019 12:28 pm
I just checked my asset allocation for the first time in a long time. I am significantly higher in stocks than I'm supposed to be. I have made all the changes I can in my tax-deferred accounts, but am still overweight stocks. At this point, I assume I should just sell stocks in my taxable account, even though doing so will trigger capital gains taxes. Have I got that right?

Also, I can't harvest significant capital losses.
That's a good problem to have. It would help to know more about the severity of the problem you're trying to fix and how quickly you need to address them. There are some options, but only in limited situations, but tradeoffs are always involved.

What is your current AA and desired AA? Individual stocks or diversified funds? How much are you adding and why are you selling? Just to fix AA or diversification or need cash?

Some folks have mentioned already, but step up basis, donate, and staying put are on top of my list. You can just buy only tax exempt bonds with all the cash you have (new contributions, dividends, etc.) for now and see how things go for a while, or whether you keep getting more significant divergence from desired AA.

If you're really concerned about a market crash, buy some SPY puts, which aren't too expensive right now with the low volatility we've been seeing. It's like insurance, so it's going to cost you in returns and you have to figure out how much protection you want or need. Probably tax deductible, so you can offset selling some gains.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by fredflinstone » Fri Nov 15, 2019 6:36 pm

Thanks, everyone, for all the feedback. I really appreciate it.

I think I have come up with a nice solution. My wife and I can probably keep our income well below $79,000 next year. If so, my understanding (correct me if I'm wrong) is that our long-term capital gains tax rate will be zero starting January 1,2020. So if I wait until then -- just six weeks from now -- I can rebalance to my heart's content with no tax consequences. Have I got that right?

If that's the case, it seems to me it makes sense to "harvest" my gains (not sure if that's the right word) during tax year 2020. What I mean is I should sell all my funds and replace them with similar but not identical funds, incurring the capital gain while our tax rate is zero. This will be very helpful in the event that our income rises in 2021 or beyond.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by Katietsu » Fri Nov 15, 2019 6:43 pm

fredflinstone wrote:
Fri Nov 15, 2019 6:36 pm
Thanks, everyone, for all the feedback. I really appreciate it.

I think I have come up with a nice solution. My wife and I can probably keep our income well below $79,000 next year. If so, my understanding (correct me if I'm wrong) is that our long-term capital gains tax rate will be zero starting January 1,2020. So if I wait until then -- just six weeks from now -- I can rebalance to my heart's content with no tax consequences. Have I got that right?

If that's the case, it seems to me it makes sense to "harvest" my gains (not sure if that's the right word) during tax year 2020. What I mean is I should sell all my funds and replace them with similar but not identical funds, incurring the capital gain while our tax rate is zero. This will be very helpful in the event that our income rises in 2021 or beyond.
Please understand that the capital gains are included in the income that determines the rate at which your capital gains are taxed. So someone with $50000 in ordinary income plus $100000 in capital gains would have an AGI of $150,000. About half the capital gains would be taxed at 0% and about half at 15%. Sorry, I am typing on the fly otherwise I would give you more specific numbers and a more elegant explanation.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by tadamsmar » Fri Nov 15, 2019 9:05 pm

fredflinstone wrote:
Fri Nov 15, 2019 6:36 pm
Thanks, everyone, for all the feedback. I really appreciate it.

I think I have come up with a nice solution. My wife and I can probably keep our income well below $79,000 next year. If so, my understanding (correct me if I'm wrong) is that our long-term capital gains tax rate will be zero starting January 1,2020. So if I wait until then -- just six weeks from now -- I can rebalance to my heart's content with no tax consequences. Have I got that right?
No, If your cap gains are C then your federal married filing jointly cap gains tax will be 0.15*(C - MAX(80,000 - X, 0)) where X is your income. That's assuming to you don't get to the 20% cap gains bracket.

And there may be state taxes.

You can avoid federal taxes if X+C < 80,000, so you have some leeway. But I still have to pay the NC state income tax for all cap gains.
Last edited by tadamsmar on Sat Nov 16, 2019 9:14 am, edited 1 time in total.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by mortfree » Sat Nov 16, 2019 1:08 am

fredflinstone wrote:
Fri Nov 15, 2019 6:36 pm
Thanks, everyone, for all the feedback. I really appreciate it.


If that's the case, it seems to me it makes sense to "harvest" my gains (not sure if that's the right word) during tax year 2020. What I mean is I should sell all my funds and replace them with similar but not identical funds, incurring the capital gain while our tax rate is zero. This will be very helpful in the event that our income rises in 2021 or beyond.
If you are tax gain harvesting, you can sell and buy right back into the same exact funds. I believe what you are thinking of with similar but different fund is to avoid a wash sale when tax loss harvesting.

If I am wrong I know someone will be glad to correct me.

Nowizard
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Re: I need to rebalance, but hate paying capital gains tax.

Post by Nowizard » Sat Nov 16, 2019 11:08 am

Though the idea is understandable, paying taxes is preferable to deducting losses. There are ways to minimize taxes, searching for a free lunch is ultimately a losing proposition of the tail wagging the dog. Your post does affirm the adage that losses are more anxiety producing than gains are exhilarating.

Tim

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fredflinstone
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Re: I need to rebalance, but hate paying capital gains tax.

Post by fredflinstone » Sat Nov 16, 2019 6:41 pm

tadamsmar wrote:
Fri Nov 15, 2019 9:05 pm
fredflinstone wrote:
Fri Nov 15, 2019 6:36 pm
Thanks, everyone, for all the feedback. I really appreciate it.

I think I have come up with a nice solution. My wife and I can probably keep our income well below $79,000 next year. If so, my understanding (correct me if I'm wrong) is that our long-term capital gains tax rate will be zero starting January 1,2020. So if I wait until then -- just six weeks from now -- I can rebalance to my heart's content with no tax consequences. Have I got that right?
No, If your cap gains are C then your federal married filing jointly cap gains tax will be 0.15*(C - MAX(80,000 - X, 0)) where X is your income. That's assuming to you don't get to the 20% cap gains bracket.

And there may be state taxes.

You can avoid federal taxes if X+C < 80,000, so you have some leeway. But I still have to pay the NC state income tax for all cap gains.
aha. got it. Thanks.

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Re: I need to rebalance, but hate paying capital gains tax.

Post by Ferdinand2014 » Sat Nov 16, 2019 6:47 pm

fredflinstone wrote:
Fri Nov 15, 2019 12:28 pm
I just checked my asset allocation for the first time in a long time. I am significantly higher in stocks than I'm supposed to be. I have made all the changes I can in my tax-deferred accounts, but am still overweight stocks. At this point, I assume I should just sell stocks in my taxable account, even though doing so will trigger capital gains taxes. Have I got that right?

Also, I can't harvest significant capital losses.
Rebalancing to an arbitrary asset allocation with the result being more taxes. I personally would never do that. I don’t rebalance.
Last edited by Ferdinand2014 on Sat Nov 16, 2019 6:50 pm, edited 1 time in total.
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Re: I need to rebalance, but hate paying capital gains tax.

Post by Gnirk » Sat Nov 16, 2019 6:49 pm

fredflinstone wrote:
Fri Nov 15, 2019 12:28 pm
I just checked my asset allocation for the first time in a long time. I am significantly higher in stocks than I'm supposed to be. I have made all the changes I can in my tax-deferred accounts, but am still overweight stocks. At this point, I assume I should just sell stocks in my taxable account, even though doing so will trigger capital gains taxes. Have I got that right?

Also, I can't harvest significant capital losses.
I'm retired and in that same boat, am not taking distributions from my taxable so can't re-balance that way, and really don't want to give 15% of the gain to the gov't.

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hisdudeness
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Re: I need to rebalance, but hate paying capital gains tax.

Post by hisdudeness » Sat Nov 16, 2019 10:12 pm

Hockey10 wrote:
Fri Nov 15, 2019 5:04 pm
Gift some stock to Pebbles and Bam-Bam.
:happy Good one!

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Re: I need to rebalance, but hate paying capital gains tax.

Post by Call_Me_Op » Sun Nov 17, 2019 7:45 am

fredflinstone wrote:
Fri Nov 15, 2019 12:28 pm
I just checked my asset allocation for the first time in a long time. I am significantly higher in stocks than I'm supposed to be. I have made all the changes I can in my tax-deferred accounts, but am still overweight stocks. At this point, I assume I should just sell stocks in my taxable account, even though doing so will trigger capital gains taxes. Have I got that right?

Also, I can't harvest significant capital losses.
Fred,

You and Wilma will be very happy to have paid those taxes and protected the balance of the proceeds when the market turns.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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