Long-term Capital Gain/Loss Harvester

[Kathleen Reynolds]

#3166

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Certain types of assets can achieve a tax benefit from realizing capital gains or losses in a specific year. Knowing when to realize capital gains and losses can reduce the overall taxes that are paid, increase the rate of returns, and in some cases, allow you to enjoy tax-free gains.

A working knowledge of how taxation applies to capital gains/losses is needed. In addition, its important to be able to estimate the taxable income in projected years. In order to Harvest Capital Gains, its important to analyze the years where it would make sense to realize a capital gain or loss to when its most beneficial. Such situations could be when the taxable income falls below a capital gains threshold from one year to the next.

Every situation is different, and harvesting may not make sense when several things are considered. If the person has very large capital gains, this will likely move the tax payer to a different bracket. In addition, the capital gains increase the adjusted gross income, and its possible that certain tax deductions become less deductible (such as medical expenses). In addition, the increase in adjusted gross income could make Social Security benefits taxable. Lastly, state specific income taxes often have different rules in regards to capital gains, and its possible to incur a state capital gains tax greater than the federal calculation.

Entering Data

• Current Year Enter the current year, or the first year of the analysis.
• Years to Run Analysis Enter the number of years in the analysis.
• Asset Name Enter the name of the asset.
• Asset Balance as of 12/31 Enter the asset balance as of 12/31 of the current/first year of the analysis. Growth in the first year will not be applied, so if include growth if necessary.
• Asset Basis Enter cost basis for the asset.
• Asset Growth Rate Varies If the answer is “No”, an input field will appear to the right of the selection. This value will be used for all years of the analysis. If the answer is “Yes”, a button “Edit” will appear to the right. Clicking on this button will allow you to enter custom growth rates of the asset for each year of the analysis. Growth rates can be positive or negative.
• Tax Method Selecting “Use Tax Rates” will allow you to manually enter capital gains rates to be used for the analysis. Selecting “AGI” will allow you to enter projected Adjusted Gross Income values, which makes the calculation a little more complex, but more accurate.
• Current Capital Gains Rate If “Tax Method” is set to “Use Tax Rates”, this input will show that allows you to select the capital gains rate that is applicable in the current/first year of analysis. You can select between 0%,15%,20%, as well as making an assumption that §1411 tax is applicable. In those situations, the 3.8% tax is added to the capital gains tax rates of 15% and 20%.
• Future Capital Gains Rate If “Tax Method” is set to “Use Tax Rates”, this input will show that allows you to select the capital gains rate that is applicable for the future. You can select between “Same as Current” or “Custom Entry”. Selecting “Custom Entry” will allow you to set unique capital gains rates to be applied in every year of the analysis.
• Current Filing Status If “Tax Method” is set to “AGI”, this input will show that allows you to select the filing status for the current/first year of analysis. You can select between Single, Joint, Separate, or Head of Household.
• Current AGI If “Tax Method” is set to “AGI”, this input will show that allows you to set the Adjusted Gross Income for the current/first year of analysis.
• Inflation Rate If “Tax Method” is set to “AGI”, this input will show that allows you to set the Inflation Rate for future years. This will be used to adjust the tax brackets. In addition, it could be used to adjust the AGI entered for future years, if that option is selected.
• Future Filing Status If “Tax Method” is set to “AGI”, this input will show that allows you to either use the current filing status, or enter year by year status. This allows you to account for future changes to filing status could have significant tax implications. In most scenarios, its likely that this option is set to “Current”.
• Future AGI If “Tax Method” is set to “AGI”, this input will show that allows you to select how future AGIs are computed. You can select to use “Same as Current”, which would use the Current AGI for all years. You can select to “Grow by Inflation” which would adjust future AGIs by the inflation rate entered. Lastly, you can select “Custom Entry” which allows you to manually enter the AGIs for each year of the analysis.

Results

Summary Tab The summary report will have two sections: Capital Gains Harvest and Capital Loss Harvest. For the Capital Gains Harvest, the program will scan the results and return the Harvest that yields the Highest Rate of Return. Additional results are displayed that shows which year and increase in Net Proceeds. If the Highest Rate of Return is 0% or less, its possible that the Capital Gains Harvest will not be ideal. The Capital Loss Harvest will scan the results that return the greatest loss.

No Harvest Tab This tab assumes NO target year is used for a harvest. After the first year, the results show a “What-if” scenario for each year. For example, if the current year is 2021, the results for 2022 would assume that the asset has been realized. For 2023, it assumes that nothing was done in 2022, but then realized in 2023. For 2024, it assumes nothing was realized in 2022 and 2023, but realized in 2024… etc. The “What-if” scenarios are used throughout the results.

YR 1 This tab assumes the “Harvest” (target) year is the first year. Once the harvest is done, the Basis will be adjusted for the remainder of the years in the analysis, based off the harvesting. For years after the target year, the “What-if” scenario is applied, such that it looks at different years and shows results as if the capital gains/losses were realized again. Each year after the target assumes that NO realization has happened between the Harvest year and the year in question. For example, if you Harvest in year 3, all the years from 4+ will have the basis adjusted. Each year after 3 will display a “What-if” realized scenario. So, year 5 in this case would assume that no realization occurred in year 4. Likewise, year 7 would assume that no realization occurred from years 4 through 6.

YR x These tabs assume the “Harvest” (target) year is done in the year stipulated. Once the harvest is done, the Basis will be adjusted for the remainder of the years in the analysis, based off the harvesting. For years after the target year, the “What-if” scenario is applied, such that it looks at different years and shows results as if the capital gains/losses were realized again. Each year after the target assumes that NO realization has happened between the Harvest year and the year in question. For example, if you Harvest in year 3, all the years from 4+ will have the basis adjusted. Each year after 3 will display a “What-if” realized scenario. So, year 5 in this case would assume that no realization occurred in year 4. Likewise, year 7 would assume that no realization occurred from years 4 through 6.

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