Holiday Tax Harvesting
End-of-Year Tax Strategy not just for the loss but the appreciated as well!
Harvesting Capital Gains on Appreciated Stocks
I was having an end of the year tax planning review with a tax client recently and stock harvesting came up. I thought only of the loss but as a savvy investor he quickly reminded me that Tax harvesting was not confined to the loss but the appreciated could be harvested as well. If you could not tell be the title, I am referring to the tax planning tool known as tax harvesting of a stock portfolio.
As the year ends, people generally turn their attention to tax planning to maximize benefits and minimize liabilities. One of the tax planning tools that frequently comes up is the tax harvesting of a stock portfolio. While tax-loss harvesting is a common end-of-year strategy, there’s another underutilized tool for managing taxable stock portfolios: harvesting long-term capital gains. If you hold stocks that have appreciated significantly, leveraging this strategy can provide surprising financial and tax advantages. First let’s see how exactly this tax planning tool works. Then we will discuss why this type of tax harvesting may or may not make sense for you.
What Is Long-Term Capital Gain Harvesting?
Capital gain harvesting involves selling appreciated investments to realize gains while taking advantage of favorable tax rates. For stocks held for over a year, these gains qualify as long-term capital gains, which are taxed at lower rates compared to ordinary income.
In 2024, the federal long-term capital gains tax rates are:
0% for taxable income up to $89,250 (married filing jointly) or $44,625 (single filers).
15% for taxable income above these thresholds and up to $553,850 (married) or $492,300 (single).
20% for incomes exceeding these limits.
The strategic timing of the realization of long-term gains could reduce your overall tax burden or lock in tax-efficient growth.
Why Harvest Gains Now?
Lock In a favorable long-term capital gain Tax Rate
If you know this is a year in which your taxable income could be much lower or definitely within in a specific long-term capital gains bracket, you can sell appreciated assets positioning yourself to pay the least amount federal tax on the realized gains. This is especially advantageous for retirees, part-time workers, or anyone experiencing a lower-income year.
Example: A married couple with $50,000 in taxable income can realize up to $39,250 in long-term gains and pay no federal tax.
Anticipate Future Tax Increases
If you expect your income or tax rates to rise in the future, realizing gains now could save you money in the long run. Selling at today’s lower rates protects against the possibility of higher rates down the road.
Reset Your Cost Basis (No Wash Sale)
Selling appreciated stocks allows you to repurchase them immediately (or similar investments) at their current market price, resetting the cost basis to a higher level. This strategy helps minimize future capital gains taxes, especially if you expect the stock to continue appreciating.
Diversify Your Portfolio
If a particular stock has grown disproportionately and now dominates your portfolio, realizing gains can help you rebalance. By harvesting gains, you can reinvest in other assets, reducing risk while taking advantage of favorable tax treatment.
How to Harvest Long-Term Gains Wisely
This tax planning strategy is one that can appear very complicated at first glance but with assistance from trained professionals or the use of tax-planning software, it can be accomplished. In approaching this strategy there several things you will want to evaluate, consider and be mindful of.
Evaluate Your Tax Bracket
Evaluate your projected taxable income and determine how much you can harvest without pushing yourself into a higher tax bracket.
Consider State Taxes
While federal long-term gains rates can be as low as 0%, some states tax capital gains as ordinary income. Factor state taxes into your calculations to avoid surprises.
Mind the Medicare Surtax
If your modified adjusted gross income exceeds $250,000 (married) or $200,000 (single), a 3.8% Net Investment Income Tax (NIIT) applies to capital gains. Plan accordingly if you’re near this threshold.
Use Gains for Strategic Goals
Proceeds from harvested gains can fund Roth IRA conversions, charitable giving, or other financial goals. Each of these moves offers its own tax advantages.
Don’t Forget Wash Sale Rules
While the wash-sale rule doesn’t apply to gains, ensuring that you reinvest in diversified assets or similar-but-not-identical stocks helps avoid potential IRS scrutiny.
Why not Harvest Gains
While this strategy has clear benefits, it isn’t always the right move. You will want to avoid harvesting gains if any of the following apply to you.
You’re in a high tax bracket this year but expect lower income next year.
You’re holding investments in a taxable account but anticipate donating them directly to charity or transferring them at death, where the cost basis could step up to market value.
The assets no longer fit your long-term financial plan. Selling for gains should still align with your broader investment strategy.
In conclusion, tax harvesting of long-term capital gains is an excellent way to reduce future tax liabilities, rebalance your portfolio, and strategically position your finances for growth. Whether you aim to capitalize on being in a lower tax bracket, rebalance holdings, or prepare for rising taxes, this strategy can be a powerful addition to your year-end tax planning toolkit.
We always recommend consulting with a Pro, such as tax professional or financial planner before taking action to ensure your moves align with your broader financial goals. The Tax Man believes the right approach today, cannot only result in a strong finish to the year, but also go a long way to continuing to set yourself up for long-term financial success.
Happy planning—and here’s to a prosperous year ahead!
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