Ari Taublieb, CFP®, MBA

Tax-Gain Harvesting (How To Pay 0% In Taxes – Early Retirement)

Have a burning question about early retirement, taxes, or anything else we discuss on our podcast? We want to hear from you!

Who loves paying taxes? Nobody – that’s why I love talking about tax-gain harvesting.

Tax-gain harvesting is a popular investment strategy used by many investors to reduce or eliminate taxes on their capital gains. The idea behind tax-gain harvesting is to sell an investment that has appreciated in value and realize a capital gain, which can then be offset by any capital losses that the investor may have incurred during the year. This can be especially useful for those in early retirement who want to minimize their tax liabilities and maximize their after-tax returns.

The basic idea behind tax-gain harvesting is that it allows investors to take advantage of the fact that the US tax code taxes capital gains at a lower rate than ordinary income. 

In 2023, for example, long-term capital gains (i.e., gains on assets held for more than one year) are taxed at rates of 0%, 15%, or 20%, depending on the investor’s income level. For investors who are in the 0% tax bracket (i.e., those with taxable income less than $89,250 for joint filers in 2023), this means that they can realize capital gains without paying any federal taxes on them. 

Imagine you bought AAPL stock for $100,000 and it appreciated to $189,250. You could intentionally sell AAPL stock gains and pay 0% in taxes (assuming no other income). 

To take advantage of this, investors can sell appreciated assets and use the proceeds to buy similar assets, thus resetting their cost basis and realizing a capital gain. They can then use any capital losses they have incurred during the year to offset this gain, reducing or eliminating their tax liability. This can be especially useful for those in early retirement who may have lower income levels and thus may be in a lower tax bracket.

One potential downside of tax-gain harvesting is that it can result in a higher tax liability in future years if the investor sells the appreciated asset at a later date. This is because the cost basis of the asset will have been reset to a higher level, which means that any future gains will be higher and thus subject to higher taxes. 

Tax-gain harvesting can be a useful strategy for those in early retirement who want to minimize their tax liabilities and maximize their after-tax returns. By taking advantage of the lower tax rates on capital gains, investors can realize gains without paying any federal taxes on them. 

However, you should be mindful of the potential downsides of this strategy – and you should always consult a financial advisor prior to making any decisions. 

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