Tax-gain harvesting is a lesser-known strategy that can be utilized to rebalance your portfolio and potentially save on future taxes. This tactic involves strategically selling profitable assets in your brokerage account during lower-income years, such as the early years of retirement or periods of unemployment. The goal is to realize gains at a 0% rate, taking advantage of the current tax laws and regulations.
The capital gains brackets apply to long-term capital gains, which are assets owned for over a year. This is in contrast to short-term investments, which are subject to regular income taxes. For example, for the year 2024, you may qualify for a 0% capital gains rate if your taxable income is up to $47,025 for single filers or up to $94,050 for married couples filing jointly. This can be a very lucrative opportunity, especially for married couples filing jointly.
Tax-gain harvesting offers several benefits, including the ability to rebalance your brokerage assets without triggering gains. Additionally, by selling a profitable asset and immediately repurchasing it, you can reset your “basis” or original purchase price. This can result in potential tax savings in the long run. Unlike selling assets at a loss, where the wash sale rule applies, harvesting gains does not have the same restrictions. This strategic move can have a significant impact on reducing future gains, especially in higher-earning years.
According to experts, the optimal time for tax-gain harvesting is typically in October or November when investors can better estimate their taxable income for the year. It is important to leave some buffer room to avoid hitting the 15% capital gain bracket when implementing this strategy. While tax-gain harvesting is more attractive in lower-income years, such as early retirement, caution should be exercised by younger retirees with marketplace health insurance, as higher income could jeopardize premium tax credits.
Tax-gain harvesting can be a strategic financial move to consider, particularly during strong market years. By taking advantage of the current tax laws and regulations, you can potentially save on future taxes while rebalancing your portfolio. It is essential to consult with a financial advisor or tax professional to determine the best approach for your specific financial situation.