PFwise.com
Search
  • Home
  • Blog
  • Tools
  • Know-how
    • Insurance 101
    • Annuity 101
    • College Planning
    • Real Estate
    • Retirement Planning
    • Smart Investment
    • Stock Ideas
    • Tax Planning
  • About Us
  • 中文
  • Resources
    • Personal Finance Reading List
    • Financial Aid Resources
    • Personal Finance Calendar
    • Retirement Planning Calendar
    • ETF list
    • Financial Glossary
  • Newsletters Archive

Harvest Capital Gains or Losses

12/19/2013

0 Comments

 
Picture
The Changing Capital Gain Tax Structure
For the past several decades, there have only been two capital gains tax rates - an ultra-low rate (10%, then 5%, now 0%) for those the bottom ordinary income tax bracket(s), and a single top rate (20%, now 15%) for all other capital gains income. Thus, regardless of whether someone had $50,000, or $250,000, or $500,000 of capital gains, once past the bottom bracket(s) all capital gains were subject to the same flat top rate.

In 2013, though, this is no longer true. The introduction of a new top 20% capital gains tax bracket (on top of the existing 0% and 15% rates), along with the introduction of the new 3.8% Medicare surtax, effectively creates four long-term capital gains tax brackets: 0%, 15%, 18.8%, and 23.8%, with progressively higher rates as income rises. The significance of these new rules is not merely that capital gains may be subject to a new higher top tax rate; the presence of this new four tax bracket structure for capital gains rates dramatically changes the economic value and potential "risks" of tax deferral.

Push Capital Gains Into the Future?
The problem is that in the context of capital gains, systematically deferring gains and harvesting losses can create a larger and larger looming capital gain, and with today's four-bracket structure a larger future gain can actually result in less wealth.  While in the past the tax rate might have been the same for a $50,000 and $500,000 capital gain (at least for those beyond eligibility for 0% rates), now it can be the difference between paying 15% tax rates and 23.8% instead.  Pushing gains into the future that trigger the 3.8% Medicare surtax, and possibly the new top capital gains rate as well, can overwhelm the value of tax deferral itself.

Harvesting Capital Gains Now?
Accordingly, those who are eligible for favorable long-term capital gains tax rates should consider harvesting gains in order to "lock in" tax rates at today's rates, if they are favorable.  The good news is that harvesting gains is much easier than harvesting losses.  While claiming losses requires managing around the so-called "wash sale" rules that prevent the purchase of a substantially similar security within 30 days before/after the sale that produced a loss, there is no such rule for harvesting capital gains; Congress does not have a rule that states "you owe us taxes, but since you bought the investment again, you don't have to send us the money."  To the contrary, selling an investment and buying it back must trigger income recognition and a potential tax event; except that with today's capital gains rates, that can actually be an effective tax arbitration strategy, even if it simply means selling investment positions that are up and buying them back immediately!

Similar to harvesting Roth conversions, though, the key again is not to harvest such large gains that the current tax bracket is bumped into the upper levels. Instead, the goal is to harvest just enough to fill the lower tax brackets, stop before reaching the upper brackets, and then wait to repeat the process again next year! In addition, it's also important to note that those who are harvesting capital gains should not harvest losses as well; just as harvesting gains creates wealth by capturing gains at lower rates, it's also advantageous to defer losses to the future when rates will be higher (assuming, of course, that the individual projects that their tax rates will be higher in the future than they are now in the first place).


0 Comments



Leave a Reply.

    Author

    PFwise's goal is to help ordinary people make wise personal finance decisions.

    Archives

    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013

    Categories

    All
    Annuity
    Book Reviews
    College Finance
    Finance In Formula
    Financial Scams
    For Entrepreneurs
    Healthcare
    Insurance
    Investment
    Miscellaneous
    Real Estate
    Retirement
    Savings
    Savings Ideas
    Stock-ideas
    Tax
    Tax-related

    RSS Feed

Copyright © 2013 - 2022 PFWise.com, All Rights Reserved. 
IMPORTANT DISCLOSURES
PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
About Us | Contact Us 
中文