During a strong year for the stock market, a lesser-known strategy could help rebalance your portfolio and save on future taxes.
The tactic, known as tax-gain harvesting, involves strategically selling your profitable brokerage account assets during lower-income years. That could include early years of retirement or periods of unemployment.
As of Aug. 26, the S&P 500 has surged more than 18% year to date, with strong growth in August as investors brace for interest rate cuts from the Federal Reserve in September.
“A lot of times when we’re doing this, we’re looking to realize those gains at 0%,” said Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
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The capital gains brackets apply to long-term capital gains, or profitable assets owned for over a year. By comparison, short-term investments held for one year or less are subject to regular income taxes.
“It’s very lucrative, especially if you’re married” and filing together, Lucas said.
For 2024, you may qualify for the 0% capital gains rate with a taxable income of up to $47,025 if you’re a single filer or up to $94,050 for married couples filing jointly.
These rates apply to “taxable income,” which you calculate by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
For example, a married couple earning $120,000 in 2024 could still fall below the $94,050 taxable income threshold after subtracting the $29,200 standard deduction.
Reset your basis for future savings
Tax-gain harvesting offers a couple of benefits, including rebalancing your brokerage assets without triggering gains, experts say.
You can also reset your “basis” or original purchase price, by selling a profitable asset and then immediately repurchasing, CFP Sean Lovison, founder of Philadelphia-area Purpose Built Financial Services, previously told CNBC.
“This move can be a game changer” by reducing future gains, especially when you sell later in higher-earning years, said Lovison, who is also a certified public accountant.
The ‘sweet spot’ for tax-gain harvesting
Lucas from Moisand Fitzgerald Tamayo said the “sweet spot” for tax-gain harvesting is typically in October or November, once investors can more accurately project their taxable income for the year.
Since harvesting gains increases your taxable income, you should leave “some buffer room built in there” to avoid hitting the 15% capital gain bracket, he said.
Typically, tax-gain harvesting is more attractive in lower-income years, such as early retirement before required minimum distributions. But younger retirees with marketplace health insurance can jeopardize premium tax credits with higher income, Lucas warned.
