How the 0% Rate Works
In tax year 2022, the 0% tax rate on capital gains applies to single tax filers with taxable incomes up to $41,675 and married taxpayers who file joint returns with taxable incomes up to $83,350. There may be years when you’ll have less taxable income than in others—maybe you’re self-employed or are working part-time. You can also sometimes make a low-tax year occur on purpose in retirement by choosing which accounts to take withdrawals from each year. Let’s say you’re married and your taxable income this year, calculated after subtracting your itemized deductions or standard deduction, is going to be about $60,000. You have about $23,360 of room ($83,350 minus $60,000) for more income before you hit the 15% long-term capital gains bracket. You have a tax-planning opportunity if you own stocks or mutual funds in a non-retirement account and some of them have unrealized long-term gains. Let’s say you have stock in Company A you bought for $20,000 several years ago and you were planning to hold it until it’s worth $50,000. It’s worth $40,000 now. You can sell it, realize the long-term capital gain of $20,000, and pay no taxes on the gain. Then you could then turn around and immediately buy that same stock again for $40,000. This price becomes your cost basis for any future gains. When the value of your holdings hits $50,000, let’s say in two years, you will only have $10,000 worth of gains to pay taxes on. Assuming you no longer qualify for the 0% capital gains rate, you will need to pay the 15% long-term capital gains rate on that gain, but it’s a much smaller gain than it would have been if you hadn’t harvest the $20,000 gain now.
How To Harvest Your Capital Gains
Unlike tax-loss harvesting, which can be done at any time of the year, you should wait until the end of the year to implement capital gains tax harvesting. That way, you’ll have a better idea of what your total income and losses will be. There are several other tips you should know as you consider reaping the benefits of your capital gains.
Benefits of Harvesting Gains for Retirees
Gain harvesting can be an effective way to realize tax-free gains, but you must build a habit of projecting taxes and looking for tax opportunities by the end of each year to make it work. You can reduce your tax bill during your retirement years by doing this consistently, which means more of your retirement income goes in your pocket.
