SERVING UNIQUELY SUCCESSFUL FAMILIES
Step Up...or Get Out

Step Up...or Get Out

A quest to lower our lifetime effective tax rate

We often receive calls from our clients asking if it’s a good time to harvest capital losses to “offset capital gains” to help reduce their current tax liability. We believe the root cause for such a disdain for current taxes is a learned response that occurs early in one’s life as evidenced by this telling video... 

 

As such, we have an inalienable right to strive to pay as LITTLE TAX AS WE CAN within the rules of the law. Quite often, one of the most sinister and forgotten taxes is the Capital Gains tax. This is the tax assessed on all gains realized on the sale of after-tax investments. Although onerous, capital gains taxes are actually much lower than ordinary income taxes. For married couples, the federal capital gains tax rate is 15% for income up to $250,000 and 18.8% (the additional 3.8% is the Medicare Surcharge) for income up to $488,850, and 23.8% for all amounts in excess of this. Additionally, while each state is different, most apply their state tax to all capital gains on a flat basis beginning on dollar one.

It is critical that we develop a real understanding and vision of not only when we want to retire, but WHERE. Then, review and determine the specific capital gains taxes for the state in which you reside as well as the state in which you’d like to retire. If the state in which you’d like to retire has a similar or even higher capital gains tax rate, and/or if you don’t plan on moving but your state plans on INCREASING ITS STATE TAX BURDEN (like Illinois is looking to do in 2020), then consider selling your current after-tax investments and buying them right back 3 seconds later to effectively harvest capital gains and step-up your cost basis. (Note: “Wash-sale” rules don’t apply on sales for a gain, only for a loss.) Although painful today, you can “lock-in” historically low federal tax rates as well as “front-run” increases in your state’s tax rate as well.

If your plan is to spend your own money, and capital gains taxes are historically low, you owe it to yourself to consider harvesting these gains now at lower lifetime rates than may be available later.

Now don’t forget...there is one surefire way to avoid capital gains tax, and actually achieve a step-up in the basis of your after-tax assets – DEATH. In all seriousness, if our clients truly have more money than they will ever spend, we discuss the “best” assets to leave to the next generation are any and all Roth assets, and then, highly appreciated after-tax assets. However, if your plan is to spend your own money, and capital gains taxes are historically low, you owe it to yourself to consider harvesting these gains now at lower lifetime rates than may be available later.