Evaluating the Tax Deferral and Tax Bracket Benefits of Tax Loss Harvesting

[MachineGhost]

Here's a contrary argument about the value of tax harvesting:

[quote=https://www.kitces.com/blog/evaluating- ... arvesting/]Of course, perhaps the greatest caveat to tax loss harvesting, though, is simply that none of these more granular loss harvesting opportunities, or the ability to check regularly for losses to harvest, will matter if there are no capital gains to offset with those losses in the first place! Under the Internal Revenue Code, if there are no capital gains to match against the losses, then up to $3,000 of losses can be applied against ordinary income, but the remainder must simply be carried forward for future use, generating no tax deferral savings, no opportunity for compounding growth, and no potential for tax bracket arbitrage at all! In fact, for many investors, harvesting losses when there are no gains to offset simply creates carryforward losses that just get used in the future to offset the gains created by harvesting the loss in the first place, which produces no economic benefits to harvesting the loss at all!

The bottom line, though, is simply this: tax loss harvesting does have some economic benefit over time, although it’s driven not by the outright savings (typically measured by “tax alpha”?), but instead by the economic value of tax deferral, which leads to modest but non-trivial economic benefits over time. For those who may experience tax bracket changes, the benefits can be significant amplified – for better or worse – and in fact, the impact of tax bracket arbitrage can be many times more significant than the underlying benefits of tax deferral itself. As a result, it’s crucial to focus not just on the tax deferral value of loss harvesting, but also the potential tax bracket impacts… and to the extent any anticipated tax bracket changes are favorable, and there are gains to offset with the losses in the first place, harvest as much as possible, maximizing the opportunity for each contribution, each investment/asset class being held, and by “checking”? for loss harvesting opportunities as often as possible![/quote]

This one -- which sophie mentioned previously -- is very good too:

[quote=https://www.kitces.com/blog/understandi ... -in-basis/]For “lower income”? individuals whose income falls within the bottom two ordinary income tax brackets, the Internal Revenue Code applies a 0% long-term capital gains rate to the extent their gains also fall within the lower two brackets. However, the 0% rate only applies as long as the income actually does fall within those lower brackets – which means “too much”? in capital gains will eventually cross out of the 0% rate and into the higher tax brackets.

Nonetheless, the potential for 0% long-term capital gains rates means that for those who are eligible, the best thing they can do every year is not harvest capital losses – the “typical”? capital gains strategy – but instead to harvest gains! By selling investments that are up, and buying them back again immediately (without any wash sale rules to navigate!), the taxpayer can effectively get a step-up in basis on current investments without any (Federal) tax liability!

Of course, the caveat to this strategy is that while long-term capital gains may be eligible for 0% rates for lower income individuals, it is still income itself, potentially impacting certain deductions and tax credits, and the taxation of Social Security. In addition, harvesting capital gains must be coordinated with other strategies, like partial Roth conversions, which can potentially drive up long-term capital gains rates and make capital gains harvesting less effective. Still, though, the potential to claim a free step-up in basis is not one to be missed, for any years where income is low enough to take advantage of the rules, whether due to just having income low enough to qualify, having a “temporarily”? low income year due to a job loss or change, or simply looking to harvest capital gains once retired when wage income is gone and required minimum distributions have not yet begun!
[/quote]

[Libertarian666]

My program takes account of that possibility. Of course, there is no way to know what actual asset values will be in the future, so it is just a projection, not a certainty.

[coinstar]

I know about the $3000 carry forward losses and writing against job income and that's why I care so much about Tax Lost Harvesting! It's worth $1000 in tax savings a year against my employment income! Suppose I put that $1000 of saved taxes back into the PP for 30 years. What's the present value of that?? Well worth the effort to tax lost harvest!!

[MachineGhost]

Yeah, he didn't really address the issue of taking a capital gains loss to offset against ordinary income taxes.  I think the emphasis was more on LT capital gains.  I do wonder if offsetting ordinary is still a bad thing to do in the 0% bracket since you don't get a free loan from the government (not sure I understand the logic there if you pay less than what you owe).