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If you’re sitting on profitable assets, there’s a lesser-known tax-gain harvesting strategy, which can help rebalance your portfolio or trim future taxes.
While tax-loss harvesting can be popular during a stock market downturn, tax-gain harvesting — or strategically selling appreciated brokerage account assets — can also be beneficial, depending on your financial goals, experts say.
“It’s really pretty exciting from our side,” said certified financial planner Judy Brown at SC&H Group in the Washington, D.C., and Baltimore area. She is also a certified public accountant.
One of the key opportunities for tax-gain harvesting is for investors who fall into the 0% capital gains bracket, which applies to long-term capital gains, or assets owned for more than one year.
The 0% bracket allows you to sell a certain amount of profitable assets without triggering capital gains taxes, which provides a chance to take the proceeds or rebalance your portfolio, according to Brown.
For 2023, you may qualify for the 0% rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly.
The rates use “taxable income,” which is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
‘Reset the basis’ to save on future taxes
Another perk of tax-gain harvesting in the 0% bracket is the ability to increase an asset’s purchase price, or “basis,” which can reduce future taxes, said Marianela Collado, a CFP and the CEO of Tobias Financial Advisors in Plantation, Florida. She is also a CPA.
If you want to maintain a position, you can sell an asset and immediately repurchase to “reset the basis” to the new higher price, “and it’s not costing you anything,” she said.
While the so-called wash sale rule blocks investors from claiming a tax benefit after selling a losing asset and repurchasing within 30 days, the law doesn’t apply when harvesting gains, Collado said.
She said tax-gain harvesting can also be useful when trying to avoid the so-called “kiddie tax” — an extra levy parents owe once their child’s investment income exceeds a certain threshold — or using a deceased spouse’s carry-over investment losses while they are still filing jointly.
Weigh your complete tax situation
While tax-gain harvesting can be a good strategy, it’s important to know the year’s complete financial picture before selling assets. “You can’t do this with blinders on,” Collado said.
For example, it may still be too early to know if you’re receiving year-end mutual fund payouts, which may significantly affect taxable income.
While saving on taxes is important, there are other aspects of a financial plan to consider, said Brown.
“We’re always looking for the opportunity to minimize taxes,” she said. “But in the end, we want to make sure the client is achieving their goals.”