In a booming stock market environment, it is essential to consider alternative strategies to rebalance your portfolio and potentially save on future taxes. One such tactic, tax-gain harvesting, involves strategically selling profitable assets in your brokerage account during lower-income years, such as early retirement or periods of unemployment. With the S&P 500 surging more than 18% year to date as of Aug. 26, investors are seeking ways to maximize their gains while considering future tax implications.
The concept of tax-gain harvesting primarily applies to long-term capital gains, which are profits made on assets owned for over a year. By taking advantage of the capital gains brackets, investors may qualify for a 0% rate on their gains, especially for married couples filing jointly. In 2024, the threshold for the 0% capital gains rate is $47,025 for single filers and $94,050 for married couples filing jointly. By strategically calculating your taxable income, which involves deductions from your adjusted gross income, you can potentially remain below these thresholds and benefit from the 0% rate.
One of the main advantages of tax-gain harvesting is the ability to rebalance your portfolio without triggering gains. Additionally, by selling a profitable asset and immediately repurchasing it, you can reset the original purchase price, also known as the “basis.” This can be particularly beneficial in reducing future gains, especially when selling assets in higher-earning years. Unlike the wash sale rule that applies to losses, there are no restrictions on buying back a similar asset after harvesting gains. Experts suggest that this strategy can be a game-changer in optimizing your tax liabilities.
The ideal timing for tax-gain harvesting is typically in October or November when investors have a clearer picture of their taxable income for the year. It is essential to plan strategically and leave a buffer room to avoid hitting higher capital gain brackets, such as the 15% rate. While tax-gain harvesting is more attractive in lower-income years, such as early retirement, it is crucial to consider potential implications on premium tax credits for marketplace health insurance.
Tax-gain harvesting can be a valuable strategy for investors looking to optimize their portfolio and minimize future tax liabilities. By strategically selling profitable assets during lower-income years and taking advantage of the capital gains brackets, investors can potentially save on taxes and rebalance their portfolio effectively. It is crucial to consult with a financial planner or tax advisor to determine the most suitable approach for your individual financial situation. Consider implementing tax-gain harvesting as part of your overall investment strategy to maximize your gains and minimize your tax burden.