What is gain harvesting?
What is gain harvesting?
“Gain harvesting” refers to the practice of selling a holding for a gain in a taxable account, triggering a taxable event, and immediately buying the holding back. The strategy is not applicable to retirement accounts, tax-deferred accounts, and all types of IRAs.
Say you own a holding worth $25,000 that you bought for $20,000. A gain harvest would occur by selling the holding and immediately buying it back for $25,000. This results in a $5,000 gain to be added to Schedule D of your Form 1040.
Why would anyone want to incur gains before necessary? The answer lies in tax rates. If you have owned a holding for more than twelve months when it is sold, the gain is deemed long-term. The rate applied to long-term capital gains is lower than the rate applied to ordinary income. Ordinary income includes items like wages, interest, non-qualified dividends and retirement account distributions.
Tommy Lucas, CFP®, EA explains, “In fact, if you are married and filing a joint return, to the extent your taxable income is below $94,050 in 2024 ($47,025 for single filers), the tax rate on long-term capital gains is zero. From $94,051-$583,750 ($47,026 -$518,900 for singles) the long-term capital gain rate is 15% while ordinary income is taxed at anywhere from 22%-35%. For taxable incomes higher than those levels, the capital gain rate is 20% versus 35%-37% on ordinary income. Even if, due to high income, a household is subject to the Net Investment Income Tax of an additional 3.8%, every dollar of long-term capital gain is still taxed at a lower rate than ordinary income.”
In addition, because you bought back the holding at $25,000 in our example, future gains or losses would be calculated based on that higher new purchase price of $25,000, not the original $20,000. This can yield a lower future tax bill whenever the holding is sold.
Therefore, it is possible that the result of gain harvesting can be low or even no taxes on gains now AND lower future taxation on subsequent gains.
Therefore, it is possible that the result of gain harvesting can be low or even no taxes on gains now AND lower future taxation on subsequent gains.
Strategically, gain harvesting is similar to other income acceleration strategies like a Roth conversion. You may pay some tax now to avoid more taxes later. As such, we consider gain harvesting when a client is temporarily in a low tax bracket such as when in between jobs. This strategy can also be utilized for children with assets of their own or in certain types of accounts such as custodial accounts.
Gain harvesting can sometimes make sense for retirees before Required Minimum Distributions (RMDs) begin because clients can be in a lower tax bracket today than they will be when RMDs begin. However, that is also when Roth conversions become attractive. How do you decide which is most advantageous? We run what is essentially a mock tax return to project various scenarios and compare the results to our client’s goals and priorities.
Fall is tax projection season so we will soon be analyzing these and other year-end moves to benefit our clients.
Making News…
We continue to help various media outlets provide sound information to their audiences. (Some links may require a subscription to view.)
Dan Moisand,CFP® continues to write for Florida Today and MarketWatch, which are sometimes syndicated to other sites such as YahooFinance.
Don’t let your ego tarnish your legacy – Florida Today
What is “long-term” when it comes to investing? – Florida Today
Should I jump head-first into the stock market? Or wade in slowly? – Florida Today
I don’t need my IRA right now, should I do a Roth conversion to avoid RMDs? ? – MarketWatch
Will I forfeit my 401(k) if I leave my job in fewer than five years? – MarketWatch
It is very important to us that our firm stay truly and fully independent because we believe it is best for our clients that we work solely for our clients, not third parties. DJ Hunt, CFP® recently penned a piece for Rethinking 65 in which he describes some of the ins and outs to succession planning. While none of our founders are retiring anytime soon, our clients can rest assured that the firm will be here to serve them for a long time. As DJ put it, “I’m a beneficiary of the planning our firm’s founders did more than a decade ago. Our ownership group has grown from three founders to now seven owners, with more to come over the next several years.”‘
In the News…
Coming Soon – additional security enhancements to your MFT Client Portal
While a cybercriminal cannot make a transaction, access your funds, or alter any account through your portal, they could potentially obtain important non-public information. In our efforts to keep your information secure, additional security enhancements are being added to your MFT Client Portal. For the last few years, all portal users have had the option to add a series of security questions. Beginning September 16th users will be required to add Multi-Factor Authentication in the form of either a series of security questions (if not already activated) or a one-time passcode (OTP) to login. Our operations department will send portal users an email explaining how to add the security feature and providing links to a special webpage with videos to walk you through the process.
Moisand Fitzgerald Tamayo, LLC was named to Financial Advisor magazine’s list of the top Registered Investment Advisory firms in the U.S. The list is based on assets under management.
If you are a member of an organization in need of a personal finance speaker, we are happy to talk with your group’s organizers about helping out at no cost.
Charlie Fitzgerald, CFP® added his thoughts to a CNBC article lamenting how the S&P 500 index is riskier than many realize because it is over weighted in just a few tech companies. “Nearly a third of [the S&P 500] is sitting in seven stocks,” he said. “You’re not diversifying when you’re concentrating like this.”
Tommy Lucas, CFP®, EA provided financial tips for Business News and assisted CNBC reporters on the following topics, a couple of which were syndicated to NBC affiliates:
Mega backdoor Roth conversions can boost tax-free growth — if you avoid these mistakes – CNBC
Notable
Here is a statistic so remarkable the researchers didn’t want to divulge it even after triple checking it… The average annual return of U.S. stocks when Republicans controlled the White House and both houses of Congress has been 14.52%. The average annual return of U.S. stocks when Democrats controlled the White House and both houses of Congress has also been 14.52%. (Dimensional Funds)
We take for granted how easy it is to build a diversified portfolio these days but for decades it was something only the wealthy could do. Things began to change when the mutual fund was created. 2024 marks the 100th anniversary of the debut of the first mutual fund, the Massachusetts Investors Trust.
72% of Americans lack the confidence to handle a large inheritance (Citizens)
