TAX GAIN HARVESTING

Conventional tax planning suggests that deferring income, which includes delaying capital gain recognition, is the best strategy. However, in certain situations, accelerating gain recognition can help reduce the overall tax liability in the long run. 

When taxable income falls below a certain threshold, net long-term capital gains (and qualified dividends) are taxed at a 0% tax rate. Therefore, individuals with low taxable income might consider recognizing long-term capital gains tax-free.

Assume a married couple filing jointly has 2024 taxable income of $68,000 which consists solely of wages. The top of the 0% long-term capital gains tax bracket for a married couple filing jointly in 2024 is $94,045. Therefore, they can recognize up to $26,045 ($94,045 minus $68,000) in long-term capital gains tax-free. Investors who have unrealized long-term gains but want to maintain their exposure can simply buy back into the position. This would reset the holding period, but it would also reset the cost-basis, thereby reducing future gain recognition.

Tax gain harvesting can also be utilized when an individual has already realized capital losses in the year or has capital loss carryforwards from a previous year. These losses can offset the gains, effectively allowing the individual to recognize gains tax-free.

Robert W. Baird & Co. Incorporated. Baird nor the Stevanovic Metz Group provide tax advice. Contact your tax professional.