Tax Gain Harvesting

[sickofsnow]

This is an amazing forum and I know I’ll get some great advise/opinions on this subject. We’re newly retired and both 64 years old. I just read an article on tax gain harvesting whereby you sell your winners and immediately buy them back to reset your cost basis and pay no capital gains as long as your income is under 94k for married couples filing jointly. In my case, this would include VFIAX (Vanguard 500 Index) and some individual stocks we own. Does anyone take advantage of this and if not why? Of course these are in a taxable account…
Thanks in advance

[Harmanic]

Absolutely. And even more so when you are retired and have a lower taxable income. At the very least you should harvest gains up to the 0% tax limit. This is even better than Roth conversions, since you will owe no tax at all. After that marginal rate is breached, it depends on your future tax rates and spending needs.

It also creates tax loss harvesting opportunities in the future because the basis is reset and a market drop would open up new options to take losses against other income.

[vtMaps]

Be aware that if you have social security income you will probably owe tax on some of that tax gain harvest. --vtMaps

[livesoft]

If you hold VFIAX at Vanguard, then selling would invoke the "cannot buy back for 30 days" triviality. So that's a "Why not?" But one can buy VOO instead right away.

Also do not forget about Cost Basis Method of "Specific Identification."

Of course, make sure you understand what that does for your tax return.

What's going on with your "Tax Loss Harvesting"?

[pawtucket]

I own some VTMSX that's worth 5-6x what I paid for it, so with the recent rally in small caps, I sold off a slice and put the proceeds into the preferred stock of my former employer. Harvested some gains at 0% federal and adjusted my asset allocation at the same time.

[brightlightstonight]

If you hold VFIAX at Vanguard, then selling would invoke the "cannot buy back for 30 days" triviality. So that's a "Why not?" But one can buy VOO instead right away.

That pairing might fall under the "substantially identical" rule - heck, you can convert the former into the latter and it's a non-taxable event.

[Harmanic]

If you hold VFIAX at Vanguard, then selling would invoke the "cannot buy back for 30 days" triviality. So that's a "Why not?" But one can buy VOO instead right away.

That pairing might fall under the "substantially identical" rule - heck, you can convert the former into the latter and it's a non-taxable event.

There are no tax consequence for tax gain harvesting. He is only referring to the brokerage rules regarding round trip transactions. Otherwise, he could just sell VFIAX and buy it again immediately.

The IRS rule only applies to tax loss harvesting.

[Hacksawdave]

As long as you are tracking all your sources of income to make sure you are still in the zero percent QD/LTCG tax rate you should be fine. I have been maintaining this rate for three years now and will into the near future.

Track your ordinary income, qualified dividends and then your expected long-term capital gains. Watch for distributions for taxable account holdings to make sure of when you might crack into the 15% range.

It is a bit of work, but when one call pull off a small 401k distribution, uses municipal income, maintains the 0% QD/LTCG rate, and even lump a small rollover with Roth conversion with minimal tax liability, it is quite fun!

[sycamore]

Does anyone take advantage of this...

Yes, there's even a Bogleheads' wiki article about it: Tax gain harvesting. Enjoy!

[brightlightstonight]

If you hold VFIAX at Vanguard, then selling would invoke the "cannot buy back for 30 days" triviality. So that's a "Why not?" But one can buy VOO instead right away.

That pairing might fall under the "substantially identical" rule - heck, you can convert the former into the latter and it's a non-taxable event.

There are no tax consequence for tax gain harvesting. He is only referring to the brokerage rules regarding round trip transactions. Otherwise, he could just sell VFIAX and buy it again immediately.

The IRS rule only applies to tax loss harvesting.

D'oh

[mhadden1]

As long as you are tracking all your sources of income to make sure you are still in the zero percent QD/LTCG tax rate you should be fine. I have been maintaining this rate for three years now and will into the near future.

Track your ordinary income, qualified dividends and then your expected long-term capital gains. Watch for distributions for taxable account holdings to make sure of when you might crack into the 15% range.

It is a bit of work, but when one call pull off a small 401k distribution, uses municipal income, maintains the 0% QD/LTCG rate, and even lump a small rollover with Roth conversion with minimal tax liability, it is quite fun!

It is fun to pay near $0 in taxes! I have been harvesting gains and paying at the 0% rate for a few years now. Lucky to be MFJ.

[Running Bum]

The only reason I don't take advantage is that I use this space to do very low tax rate Roth conversions instead. It's case by case which way to go, and it probably doesn't matter much which one you do, as long as you make use of that space.

[Hacksawdave]

As long as you are tracking all your sources of income to make sure you are still in the zero percent QD/LTCG tax rate you should be fine. I have been maintaining this rate for three years now and will into the near future.

Track your ordinary income, qualified dividends and then your expected long-term capital gains. Watch for distributions for taxable account holdings to make sure of when you might crack into the 15% range.

It is a bit of work, but when one call pull off a small 401k distribution, uses municipal income, maintains the 0% QD/LTCG rate, and even lump a small rollover with Roth conversion with minimal tax liability, it is quite fun!

It is fun to pay near $0 in taxes! I have been harvesting gains and paying at the 0% rate for a few years now. Lucky to be MFJ.

Congratulations! I am on the single rate so I must constantly count the beans to make sure I can pull it off. It takes planning and monitoring but is worth the effort to do it.

[Harmanic]

The only reason I don't take advantage is that I use this space to do very low tax rate Roth conversions instead. It's case by case which way to go, and it probably doesn't matter much which one you do, as long as you make use of that space.

Ideally, you would harvest gains during up years and then do Roth conversions during down years while offsetting the taxes with loss harvesting on the funds that were previous harvested for gains, but have a higher cost basis before the market decline.

[cas]

[. . .] I just read an article on tax gain harvesting whereby you sell your winners and immediately buy them back to reset your cost basis and pay no capital gains as long as your income is under 94k for married couples filing jointly.

The way you have it phrased, I think you understand what I'm about to say. But, since it is a VERY common misunderstanding I've seen in these sorts of threads on this forum, I'll say this just to be safe:

The 94K income number *includes* the realized capital gains. (And note that the 94K is Taxable Income, which is after standard/itemized deduction is subtracted from Adjusted Gross Income.)

(The common mistake I see on this forum is that people start a thread all excited because they think they've just read that, as long as all their non-LTCG income is below 94K, they can supposedly pay the 0% LTCG rate on an unlimited amount of long term capital gains. <--- This is false.)

[. . .]We’re newly retired and both 64 years old. [. . .]

How are you getting your health insurance until you have both go on Medicare?

If it is via COBRA or employer retiree health insurance, then there is no problem.

If it is via ACA, then any additional realized LTCG will cause some phase out of cost sharing (if any) and premium tax credits. These sorts of credit phase-outs can result in surprisingly high marginal tax rates (8.5% to 14% or so) on LTCG that is technically eligible for the 0% LTCG tax rate.

[Running Bum]

The only reason I don't take advantage is that I use this space to do very low tax rate Roth conversions instead. It's case by case which way to go, and it probably doesn't matter much which one you do, as long as you make use of that space.

Ideally, you would harvest gains during up years and then do Roth conversions during down years while offsetting the taxes with loss harvesting on the funds that were previous harvested for gains, but have a higher cost basis before the market decline.

Sure, but there is another factor that I might not ever use my taxable funds with big gains, so my heirs will get stepped up basis. That makes Roth conversions more attractive because someone will eventually pay taxes on my IRA. So while I'm at the lowest tax rate I'll be before SS, small pension and RMDs start, I'll take the Roth conversions and not "waste" that space on 0% LTCGs when my heirs will get the same benefit with stepped up basis. Other people may have a different situation.

[Harmanic]

The only reason I don't take advantage is that I use this space to do very low tax rate Roth conversions instead. It's case by case which way to go, and it probably doesn't matter much which one you do, as long as you make use of that space.

Ideally, you would harvest gains during up years and then do Roth conversions during down years while offsetting the taxes with loss harvesting on the funds that were previous harvested for gains, but have a higher cost basis before the market decline.

Sure, but there is another factor that I might not ever use my taxable funds with big gains, so my heirs will get stepped up basis. That makes Roth conversions more attractive because someone will eventually pay taxes on my IRA. So while I'm at the lowest tax rate I'll be before SS, small pension and RMDs start, I'll take the Roth conversions and not "waste" that space on 0% LTCGs when my heirs will get the same benefit with stepped up basis. Other people may have a different situation.

That works too. Like the saying goes, “there is more than one way to skin a cat.”

[sickofsnow]

Thanks everyone for the thoughtful responses. Although I’ve tax loss harvested before this will be my first attempt at tax gain harvesting if I can. My big thing is trying to keep below 94k as I learned last year when we had to pay back some ACA credits. Aside from each of us collecting social security, we also have rent from a commercial building we own and the distributions we have from the Wellesley (VWIAX) we hold in our taxable account. Please for the love of God, don’t yell at me! I know NOW this is one of the worst funds to hold in taxable but we’ve had it a long time before I found this forum. I’m sure I’ll have a few questions as I process all the information you’ve given us.

[legalwriter1]

You can also do tax gain harvesting within a UTMA/UGMA account for children as long as you stay within the kiddie tax limit.
The kiddie tax doesn't start until the child earns $2,600 per year so that's another $2,600 per year in space per child at the 0% tax rate. I have both 529 and UGMA accounts for my children. I control UTMA accounts in my state until age 21.

[mffl]

If you hold VFIAX at Vanguard, then selling would invoke the "cannot buy back for 30 days" triviality. So that's a "Why not?" But one can buy VOO instead right away.

That pairing might fall under the "substantially identical" rule - heck, you can convert the former into the latter and it's a non-taxable event.

There are no tax consequence for tax gain harvesting. He is only referring to the brokerage rules regarding round trip transactions. Otherwise, he could just sell VFIAX and buy it again immediately.

The IRS rule only applies to tax loss harvesting.

D'oh

Don't feel bad. When I did this for several years, Fidelity got very confused and kept telling me I'd messed up by re-buying the same security within 30 days. I'm like, I KNOW, I'm *trying* to realize the gain. The strategy worked but confused both Fidelity and my tax preparer.

[rkhusky]

Note that you will probably owe state taxes on your taxable gains.

[snic]

This is an amazing forum and I know I’ll get some great advise/opinions on this subject. We’re newly retired and both 64 years old. I just read an article on tax gain harvesting whereby you sell your winners and immediately buy them back to reset your cost basis and pay no capital gains as long as your income is under 94k for married couples filing jointly. In my case, this would include VFIAX (Vanguard 500 Index) and some individual stocks we own. Does anyone take advantage of this and if not why? Of course these are in a taxable account…
Thanks in advance

Just remember that the capital gains count towards the $94k.

Don't feel bad. When I did this for several years, Fidelity got very confused and kept telling me I'd messed up by re-buying the same security within 30 days. I'm like, I KNOW, I'm *trying* to realize the gain. The strategy worked but confused both Fidelity and my tax preparer.

Why were you talking to Fidelity at all? My feeling with these brokerages is that if I'm not talking with them, they can't sell me anything.

[Hacksawdave]

...the distributions we have from the Wellesley (VWIAX) we hold in our taxable account. Please for the love of God, don’t yell at me! I know NOW this is one of the worst funds to hold in taxable but we’ve had it a long time before I found this forum. I’m sure I’ll have a few questions as I process all the information you’ve given us.

No chastising from me as I have the Vanguard balanced fund STAR in my taxable. As long as you maintain the 0% QD/LTCG rate it will be an annoyance if you have room to accommodate the ordinary income part. Do you reinvest the distributions from Wellesley, or take them in cash?