Understanding How Tax Gain Harvesting Works
Tax gain harvesting comes into play when you fall within the 0% capital gains bracket, applicable to long-term capital gains or assets owned for over one year. To qualify for the 0% tax rate in 2023, single filers must have a taxable income of $44,625 or less, while married couples filing jointly must have an income of $89,250 or less. It’s important to note that these rates apply to your “taxable income,” which is derived by subtracting the greater amount between standard or itemized deductions from your adjusted gross income.
However, it’s crucial to consider state capital gain taxes as each state has its regulations, advised Stephen Maggard, a certified financial planner and enrolled agent at Abacus Planning Group in Columbia, South Carolina.
Resetting the Basis to Gain an Advantage
One of the significant advantages of tax gain harvesting in the 0% bracket is the opportunity to reset the asset’s purchase price, also known as the “basis,” shared Lovison. He emphasized that this move can be a game-changer, as it significantly reduces future taxable gains, particularly when selling profitable assets in higher earning years.
Lovison further explained that the “wash sale rule,” which prohibits tax breaks for losses when investors repurchase the same asset within 30 days, does not apply to harvested gains. Taking advantage of the 0% capital gains bracket can also be an opportunity to rebalance or divest concentrated positions, especially for new retirees who have not yet started required minimum distributions, advised Edward Jastrem, a certified financial planner and chief planning officer at Heritage Financial Services in Westwood, Massachusetts.