in a strong year stock marketa little-known strategy may help Rebalance your investment portfolio and save future taxes.
This strategy is called tax benefit harvestinginvolves strategically selling your profitable brokerage account assets during lower-income years. This may include early retirement or periods of unemployment.
As of August 26, S&P 500 Index Soaring more than 18% year to date, with strong growth In August, investors prepare for cut interest rates From the Federal Reserve in September.
“A lot of times when we do this, we want to achieve a 0% return,” says Tommy Lucas, a certified financial planner and registered agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
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this capital gains brackets Applies to long-term capital gains or profitable assets owned for more than one year. In contrast, short-term investments held for one year or less are subject to regular income tax.
“It’s very lucrative, especially if you’re married” and filing together, Lucas said.
In 2024, if you are a single filer or less, you may qualify for the 0% capital gains rate on taxable income of up to $47,025 $94,050 for a married couple filing jointly.
These rates apply to “taxable income,” which you calculate by subtracting the greater of the standard deduction or itemized deductions from your adjusted gross income.
For example, a married couple earning $120,000 in 2024 may still be below the taxable income threshold of $94,050 after deducting the standard deduction of $29,200.
Reset the foundation for your future savings
Experts say there are many benefits to tax gain harvesting, including rebalancing your brokerage holdings without triggering a gain.
You can also reset your “base,” or original purchase price, by selling a profitable asset and then immediately buying it back, Sean Lovison, CFP, founder of Purposebuilt Financial Services in the Philadelphia area, previously told CNBC.
back Selling assets at a lossthe so-called Wash sale rules If you repurchase “substantially the same” asset within 30 days before or after the sale, the tax deduction is blocked. But the same rules don’t apply to harvesting benefits.
Lovison, a certified public accountant, said “this move could be a game-changer” because it would reduce future gains, especially if you sell later in the year when income is higher.
The “sweet spot” for tax benefits
Moisand Fitzgerald Tamayo’s Lucas said the “best time” to harvest tax benefits is usually in October or November, once investors can more accurately predict taxable income for the year.
Because harvesting gains increases your taxable income, you should leave “some buffer” to avoid hitting the 15 per cent capital gains bracket, he said.
Typically, tax benefits are more attractive in low-income years, such as early retirement required minimum distribution. But young retirees with marketplace health insurance may be at risk premium tax credit Lucas warns that the pay is higher.
