Tax Harvesting at Year End

Gene Sulzberger

By Gene Sulzberger

With the run up in the stock market over the past few years there are hopefully some hefty long-term unrealized gains in your investment portfolio.

One of the checklist tax items on many taxpayer’s end of year lists is to look at their overall realized capital gains and/or losses and see if it makes sense to off set these by selling any securities before the year ends. This process is called tax harvesting – turning unrealized long-term capital gains or losses into realized capital gains or losses for tax purposes.

For many investors, tax gain/loss harvesting is a vital tool for reducing taxes, both now and in the future. Not only can it help save you on taxes, but it can help you diversify your portfolio.

A prime example of tax harvesting is where you have a loss on Security X which can be sold to off set the increase in value of Security Y (if sold), thus eliminating or greatly reducing the capital gains tax liability for Security Y.

Capital gains taxes can either be short term or long term. If you sell an appreciated security within one year … the capital gains tax rate on that asset will be the same as your regular income tax rate. The highest income tax brackets are 28 percent, 33 percent, 35 percent and 39.6 percent.

However, if you wait more than a year to sell that appreciated security, your capital gains tax rate on that asset will be 20 percent, much lower than the aforementioned income tax brackets.

One guideline to remember is that short-term and long-term losses have to off set gains of the same type. This rule can be ignored though if your losses exceed the type of gains you are trying to cancel out. Then you can apply those excess losses to the other types of gains that have not been off set yet. Tax harvesting by selling assets to minimize capital gains taxes also can provide you with the necessary cash to reinvest securities in other areas to provide you with some added diversification. Trimming the amount you have invested in an overly appreciated asset can provide you with the opportunity to diversify into another area of the market to help reduce your overall potential volatility.

Another way to minimize the capital gains taxes you may owe is to sell securities in years when your income takes a dip, especially if you have securities held short term. If you are in a lower income tax bracket, then the capital gains tax rate charged will not be as high.

By the way, if you are in the 10 percent or 15 percent tax bracket, the long-term capital gains tax rate is 0 percent. In 2017, married couples filing jointly with taxable income of up to $75,900 are eligible for the 0 percent long-term capital gains tax rate. Singles with taxable income of up to $37,590 also get the 0 percent long-term capital gains tax rate. Be aware that the 0 percent capital gains rate applies only to the degree that your gains do not push you into the 25 percent bracket. In those states with state income taxes, realize that the state may still tax your profits, even if the IRS gives you a savings.

If your losses exceed your gains (or you have no gains), you can use your losses to off set up to $3,000 in ordinary income. Unused losses can be carried over to future years.

Another strategy to keep in mind with appreciated assets is to gift appreciated assets to someone who qualifies for the 0 percent capital gains rate, such as a young adult or an elderly parent. The recipient can then sell the security capital gains tax free. In 2017, you can gift up to $14,000 in cash or other assets to as many people as you like without having to file a gift tax return.

Also, if you are charitably inclined, gifting appreciated assets can save you from having to pay capital gains taxes. It is often more tax efficient to gift the appreciated asset than to sell the asset and then contribute cash.

Be aware that if you are receiving Social Security benefits, any realized capital gain may increase the amount of your Social Security that is taxed.

Also, if you hold securities for less than 61 days and receive qualified dividends from those shares, they no longer are considered qualified dividends.

I recommend that tax harvesting be part of your annual discussions with your accountant. Understand if you have any carry forward losses from previous years that can be used to off set any gains. There is no need to pay unnecessary taxes if you take the time to review your investments and understand the tax implications.


Gene C. Sulzberger is president of Sulzberger Capital Advisors, a registered investment advisory firm in Miami. He works with U.S. and international clients, helping them meet their wealth management goals. Gene is a CERTIFIED FINANCIAL PLANNERTM and a registered trust and estate practitioner (TEP). He has his Juris Doctor and previously practiced law in the area of trust and estate planning. He has over 20 years of experience in financial services and planning. Gene can be reached at (305) 573-4900 or gene@sulzbergercapital.com.