Disclaimer: This article is for informational purposes only. We are not experts. We are providing our personal opinions, and they should not be taken as legal, financial, or tax advice.
The guilty pleasure of early retirement: paying absolutely $0 in taxes!
The holy grail of early retirement: paying $0 in taxes, but doing so while selling up to $111,050 in long-term capital gains (if married in 2023).
Early retirees can reach the holy grail of early retirement by tax-gain harvesting.
Tax-gain harvesting involves selling long-term investments that have appreciated in value, to either offset capital losses or take advantage of lower tax rates.
It took me three years of retirement to do it, but we managed to sell off 80 individual stocks, and we’ve paid absolutely $0 in tax on all of our gains!
Though it certainly is a fantastic guilty pleasure of early retirement, tax-gain harvesting isn’t restricted to early retirees. Anyone can do it.
How to Harvest Tax-Free Gains on Securities
Thanks to the favorable treatment of long-term capital gains and qualified dividends, it is quite easy to sell any stocks, bonds, ETFs, or mutual funds each year, but still pay $0 in taxes.
This is perfect for not only early retirees but for anyone who wants to lock in gains and increase their cost basis.
But it gets even better because unlike tax-loss harvesting, the wash sale rule doesn’t apply.
This means that you can sell and re-buy any stock, bond, ETF, or mutual funds on the same day.
Ok, so now to the good stuff…In 2023, single filers can sell up to $41,675 in long-term gains, and married filing jointly couples have up to $83,35 in long-term gains, all in the 0% tax bracket:
|Up to $41,675
|$41,676 – $459,750
|Married filing jointly
|Up to $83,350
|$83,351 – $517,200
|Married filing separately
|Up to $41,675
|$41,676 – $258,600
|Head of household
|Up to $55,800
|$55,801 – $488,500
So as you can see, the 0% rate is extremely favorable, and so long as you stay below the threshold you’ll pay absolutely $0 in taxes on any gains that you harvest.
However, one thing to keep in mind here is that qualified dividends count towards your long-term capital gains.
Qualified Dividends Are Treated as Long-term Capital Gains
One thing to keep in mind for anyone doing tax-gain harvesting is that qualified dividends are taxed as long-term capital gains.
“A dividend is considered to be qualified if you have held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date.”
In 2023, a single person has up to $41,675 at the 0% rate long-term gains (in which you’ll pay $0 tax), but any qualified dividends will count towards that total.
So for example, if you have:
- You have $20,000 in qualified dividends
- You sell $20,000 in long-term stock to tax-gain harvest
You now have a total of $40,000 taxed as long-term capital gains.
If you were to sell an additional $10,000 of long-term gains, you will now push up and over into the 15% rate for the additional $8,325 that you went over on.
So with that in mind, let’s just cover very quickly how to tax-gain harvest…
How to Tax-Gain Harvest (Step by Step):
Harvesting long-term capital gains is pretty straightforward, but will require some calculations by you to ensure that you get it right to maximize your 0% tax rate:
- Forecast your total qualified dividends and long-term capital gains for the calendar year
- Check your current tax statements at your brokerage and total everything up. Then estimate potential remaining dividends.
- Determine how much long-term capital gains $$ you have left without exceeding the 0% tax bracket
- Look at your holdings and cost basis for your unrealized gains in your brokerage account
- Expand to lot-level details to find a lot with appropriate gains that are below your previously estimated remaining long-term gains
- Sell any specific lots that meet your criteria, using “specific identification of shares”
- If buying back the investment, immediately buy back the original investment (remember there is no wash sale rule).
If done correctly and within your limit be it single or married, you’ll pay $0 tax.
You can tax-gain harvest all year round, but it is most critical to keep accurate track of your long-term gains and your estimated qualified dividends.
This way you’ll ensure that you don’t go over the limit and trigger a taxable event.
Tax-Free Gains in Early Retirement With The Standard Deduction
Alright, so let’s put this all together for an early retiree use case!
If you’ve retired early and have little to no income, then tax-gain harvesting is for you.
So if you’re married and filing jointly you not only have the initial $83,350 at the 0% tax rate, but you also have the standard deduction of $27,700, for a total of $111,050 in total harvestable tax-free gains available to you.
If you’re single, you have a total of $55,525 in total harvestable tax-free gains.
Truly, it is incredible that early retirees can take such advantage of this!
Since I am married, we can take up to $111,050 in tax-free gains in 2023.
Now yes, that includes qualified dividends, but that gives us a lot of wiggle room and allows us not only to sell off stocks that we don’t want but also to tax-gain harvest ETFs that we do want like $VTI or $VXUS.
Tax-gain harvesting is surely the holy grail of early retirement.
It’s been a great way for us to re-allocate our portfolio, and going forward it’ll be a great way to lock in gains and increase our cost basis.
Tax-gain harvesting for the win!
If you have any questions, comments, or found any errors, let me know in the comments below!
Is tax-gain harvesting really worth it?
Yes, it is worth it! In 2023, single filers can sell up to $41,675 in long-term gains, and married filing jointly couples have up to $83,35 in long-term gains, all in the 0% tax bracket.
However, while tax-gain harvesting can be a valuable tool, its effectiveness varies based on individual circumstances.
It’s advisable to consult with a financial advisor or tax professional who can analyze your specific situation and help you make an informed decision.
What is the difference between tax-loss and tax-gain harvesting?
Tax-loss harvesting involves selling investments that have decreased in value to offset capital gains and/or potentially reduce taxes.
Tax-gain harvesting involves selling investments that have appreciated in value to realize capital gains, to either offset capital losses or take advantage of lower tax rates.
Do qualified dividends count towards long-term capital gains?
Yes, qualified dividends are treated similarly to long-term capital gains for tax purposes. They are subject to the same tax rates as long-term capital gains, which are typically lower than ordinary income tax rates.
To be considered qualified, dividends must meet certain criteria set by the IRS, including holding period requirements for the underlying stocks.