In a year where the stock market is performing exceptionally well, it is crucial to consider alternative strategies to rebalance your portfolio and secure future tax savings. One such strategy that is often overlooked is tax-gain harvesting. This tactic involves strategically selling profitable assets in your brokerage account during years with lower income, such as early retirement or periods of unemployment.
Benefit from the Capital Gains Brackets
The capital gains brackets are applicable to long-term capital gains, which are assets held for over a year. On the other hand, short-term investments, held for a year or less, are subject to regular income taxes. By taking advantage of the 0% capital gains rate, which is particularly beneficial for married couples filing jointly, you can realize gains with minimal tax implications. For example, in 2024, a single filer can qualify for the 0% capital gains rate with a taxable income of up to $47,025, while married couples filing jointly can benefit up to $94,050.
It is important to note that capital gains rates are applicable to taxable income, which is calculated by subtracting the standard or itemized deductions from your adjusted gross income. For instance, a married couple with an income of $120,000 in 2024 could potentially fall below the $94,050 taxable income threshold after deducting the standard deduction of $29,200. This highlights the significance of strategic tax planning and leveraging deductions to optimize your tax situation.
Maximize Benefits of Tax-Gain Harvesting
Tax-gain harvesting offers several benefits, including rebalancing your portfolio without incurring substantial gains. By selling profitable assets and immediately repurchasing them, you can reset your basis or original purchase price. This allows you to reduce future gains, especially in high-earning years. Unlike the wash sale rule, which restricts tax benefits for selling identical assets within a 30-day window, tax-gain harvesting provides more flexibility and opportunities for tax optimization.
To maximize the benefits of tax-gain harvesting, it is crucial to time your transactions appropriately. According to experts, the ideal timing for tax-gain harvesting is typically in October or November when you have a clearer picture of your taxable income for the year. It is essential to leave some buffer room to avoid hitting higher capital gain brackets, particularly the 15% bracket. This strategy is particularly attractive in lower-income years, such as early retirement, before required minimum distributions come into play.
Be Mindful of Potential Pitfalls
While tax-gain harvesting can be a valuable strategy to optimize your portfolio and reduce taxes, there are potential pitfalls to consider. For younger retirees with marketplace health insurance, higher income from harvesting gains can jeopardize premium tax credits. It is essential to weigh the pros and cons of tax-gain harvesting and consult with financial professionals to ensure that it aligns with your overall financial goals and circumstances.
Tax-gain harvesting is a lesser-known strategy that can have significant benefits for optimizing your portfolio and reducing taxes. By strategically selling profitable assets during lower-income years, you can maximize tax savings and rebalance your investments effectively. With careful planning and understanding of the tax implications, tax-gain harvesting can be a valuable tool in your financial toolkit.