Gyroscopic Investing

Question, wise ones: at the end of any year in which I project I'll be in the 10% or 15% federal income tax bracket, should I always sell all long-term assets in which I have a gain and immediately re-buy them?  Wash sale rule doesn't seem to apply, since that's only about locking in losses.  I'm talking about locking in gains: adjusting my cost basis up tax-free.

Is there any reason not to do this?  It almost seems like I must be missing something.  There's not any way that money I make by selling long-term assets could bump up my federal income tax bracket, right?

I found the hole: you only get the 0% long-term rate up to the difference between your taxable income and the top of the 15% bracket.

In other words, if you're $500 short of the 25% bracket, you only get $500 in long-term gains for free.

I do think that if anybody's significantly short of that 25% bracket, this is the correct strategy, up to the amount allowed.

I would do it up to the top of the 15% bracket, and have done so when I had LTCG to harvest.

Thanks Xan & Tech. This is a good trick to know about going forward. Here is a decent link on the subject:

http://moneyover55.about.com/od/taxtips ... estors.htm

And also a 1040 tax calculator I found online:

http://www.dinkytown.net/java/Tax1040.html

I'll definitely keep this in mind for when I have a bigger taxable account (must dump a money-hole house first).

On a related note, the last couple of years I have been selling a bit of an individual stock in a taxable account, paying something on the gains, and then funneling that money into an individual 401(k) Roth account where I hope to let it grow for 20 years or so. I'll most likely do the same in 2015 with some EE bonds that have reached their doubling date. Just trying to get more money in those Roths so that I have more tax-efficiency options in the withdrawal phase. It's just a rough calculation but I think it makes sense to pay a bit on the gains now. I am only doing this with investments I don't like for the long term.

Yes, this is called "tax gain harvesting" and is addressed on the Bogleheads wiki:

http://www.bogleheads.org/wiki/Tax_gain_harvesting

Absolutely, if you find yourself in the 15% tax bracket you should do this.  I think you have to do the sale in December though, so you'll have to guesstimate how much space you have before actually doing your taxes.  I really wish companies like Turbotax would release a tax estimator in December to simplify this process,  but they don't.  The IRS has a set of online tax preparation pages that you can use instead (e.g. to figure out how many withholding allowances you need).

Thanks, Sophie!  Nice link.

The sale definitely needs to be done in December.  I think one of the reasons that Turbotax or whoever doesn't release a tax estimator is that the tax laws for a given year (say 2014) aren't necessarily finalized until April 15.

Remember that time a few years ago when the AMT exemption "patch" expired and it went back to a 1980s amount, which would have exposed some huge percentage of taxpayers to AMT?  Congress barely got that sorted out in time.

The fact that they can change the tax rules on 2014 after 2014 is over has got to be some kind of ex-post-facto thing.  In any case it's a dereliction of duty to do this.  Makes me very angry.

sophie wrote: Yes, this is called "tax gain harvesting" and is addressed on the Bogleheads wiki:

http://www.bogleheads.org/wiki/Tax_gain_harvesting

Absolutely, if you find yourself in the 15% tax bracket you should do this.  I think you have to do the sale in December though, so you'll have to guesstimate how much space you have before actually doing your taxes.  I really wish companies like Turbotax would release a tax estimator in December to simplify this process,  but they don't.  The IRS has a set of online tax preparation pages that you can use instead (e.g. to figure out how many withholding allowances you need).

I have found that using the previous year's version of Turbotax for this sort of thing is close enough.

Seems like a solid plan. When appropriate, I might also take the opportunity to do a partial rebalance rather than simply buying the same asset.  I've considered this strategy in retirement (with little/no new income) to minimize taxes associated with large rebalancing events.

Do the shares actually need to be sold and repurchased, or can that step be avoided and simply adjust the average cost basis to reflect a sale and capital gain?  It would be nice to avoid two commissions and the spread.

Gosso, I think the problem there would be that your brokerage would report to the IRS the sale from the lower cost basis.  And then you'd have an argument with the IRS you wouldn't want to have.  So you'd need to somehow convince your broker to adjust your cost basis.  I'm 99% sure they'll tell you that the way to do that is to sell and buy again.

Also, I don't think this strategy would be appropriate for your gold allocation.  I don't want to save 15% on something now only to pay the collectibles tax on it later.

Xan wrote: Also, I don't think this strategy would be appropriate for your gold allocation.  I don't want to save 15% on something now only to pay the collectibles tax on it later.

The collectibles tax isn't a single rate, its two rates depending on your marginal bracket.  So it may work if you're in the lower bracket.

I concur with Sophie and this is the kind of thing PCs and software are ideally suited for, but it's no surprise Intuit doesn't offer it.  They care very little about their customers.

Xan wrote: Gosso, I think the problem there would be that your brokerage would report to the IRS the sale from the lower cost basis.  And then you'd have an argument with the IRS you wouldn't want to have.  So you'd need to somehow convince your broker to adjust your cost basis.  I'm 99% sure they'll tell you that the way to do that is to sell and buy again.

Also, I don't think this strategy would be appropriate for your gold allocation.  I don't want to save 15% on something now only to pay the collectibles tax on it later.

Good point on the broker reported sale, and probably not worth the hassle of trying to explain the situation to the taxman.  Although I do wonder how closely those records are scrutinized, but I agree it's best not to tempt an audit.

Xan wrote: Question, wise ones: at the end of any year in which I project I'll be in the 10% or 15% federal income tax bracket, should I always sell all long-term assets in which I have a gain and immediately re-buy them?

I'm not wise, but my wise accountant and his spouse do this tax gain harvesting with individual stocks all the time.

Once again, I am wringing my hands over whether to do this with long bonds. CraigR recently wrote a reminder about maybe doing some year-end rebalancing. I am definitely in the 15% bracket, as always, and may very well be in a higher bracket in the future. Maybe it's time to sell some of my
~4-year-old long bonds.

Because my stocks are in Vanguard funds, if I sell then I cannot re-purchase for 60 days. (yes, there are ways around that, like buying the ETF equivalent).

You could simply buy different bonds, could you not?

But TLT for 60 days works too.  Definitely worth tghing, as if bonds go down later you'll get a bigger loss to declare for free.  Take full advantage!!!

Confession: I'm thinking about chopping long term bonds down to maybe 20% after New Year's. No less than 15%, anyway. Then, when five straight years of deflation follow -- if I do it -- you can all laugh at me. 

Gosso wrote:

Xan wrote: Gosso, I think the problem there would be that your brokerage would report to the IRS the sale from the lower cost basis.  And then you'd have an argument with the IRS you wouldn't want to have.  So you'd need to somehow convince your broker to adjust your cost basis.  I'm 99% sure they'll tell you that the way to do that is to sell and buy again.

Also, I don't think this strategy would be appropriate for your gold allocation.  I don't want to save 15% on something now only to pay the collectibles tax on it later.

Good point on the broker reported sale, and probably not worth the hassle of trying to explain the situation to the taxman.  Although I do wonder how closely those records are scrutinized, but I agree it's best not to tempt an audit.

The other issue is that if you live in a state that has state/local taxes on capital gains, you'd still have to pay that and couldn't do that just by offsetting your cost basis (unless you just never told the state you live in that you sold anything).

dualstow wrote: Confession: I'm thinking about chopping long term bonds down to maybe 20% after New Year's. No less than 15%, anyway. Then, when five straight years of deflation follow -- if I do it -- you can all laugh at me. 

Bond prices will go down just enough in the next couple of weeks so that you don't have to make this call. At least that is one possibility. Watching individual PP assets every day makes you feel as if you are getting beaten up, but then you look around and can't find any injuries (trying to channel Medium Tex here). 

Yes, they might go back down by year-end. I keep thinking that, too. I don't know which is worse: if they go down and remove my urge to sell, or if they go up and force me to sell. :-)