You have probably heard about harvesting capital losses to offset capital gains in a tax year, but there is a seldom used strategy to harvest gains when there are no losses to use as an offset. The 2017 tax year may be one of those situations. What this means is that it is possible to sell stocks or mutual funds (held more than one year) that have appreciated in value without paying any income tax on the gain. This is possible because for taxpayers in the 0% or 15% tax bracket, the capital gains tax rate is $0. For the 2017 tax year, this means if your taxable income is less $37,950 for single filers, or less than $75,900 for Married filing jointly filers, then you pay no tax on any capital gains.
Let’s look at an example. Frank and Jean, a married couple, have both retired at age 60. They will file a joint tax return. Their income consists of pensions totaling $50,000 for the 2017 tax year. After adjustments and deductions, their taxable income looks like it will be $40,000. They also have a taxable brokerage account consisting of stock ETFs and mutual funds, and since 2017 has been a very good year for stocks, they have $30,000 of unrealized long-term gains. An unrealized gain means the value of your stock or fund has increased from when you originally bought it, but you have not yet sold it, so the gain is unrealized. If Frank and Jean sell those funds this year to realize the gains, then their taxable income now becomes $70,000, but since their taxable income would still be less than $75,900, all $30,000 of their long-term capital gain would not be taxed.
Since Frank and Jean will not see an increase in their income until age 70 when Social security payments and Required Minimum Distributions from IRAs or 401Ks kick in at age 70, they can repeat this strategy for the next ten years, harvesting their gains tax-free. If their situation was similar for each of those ten years, they will have received $300,000 tax-free, equating to a tax savings of $45,000 at their future capital gains’ rate of 15%.
I urge you to do a self-assessment to see if your taxable income for 2017 (less than $37,950 for singles or $75,900 for married filing jointly) will create this unique opportunity to save on income taxes. If you think you may qualify, please call Julie, Scott, or Bill to discuss a strategy.