The numbers behind tax profit harvesting: the best interest

I’m pretty good with numbers, so can you please give (in more detail?) an example of how tax revenue harvesting works in practice?

-MV

Let’s do it, MV. Let’s give you the numbers behind tax profit harvesting.

Why harvest tax profits at all?

Tax revenue harvesting is the intentional act of selling a taxable investment at a capital gain while (usually) sitting in the 0% long-term profit margin. You then immediately repurchase that asset. [It’s different than loss harvesting!]

Why harvest profits?

Because you do it correctly in that 0% bracket, you realize the capital gain without paying federal tax on it. This takes your cost basis to a higher level. This leads to two major long-term benefits:

• Future profits will be smaller (so future taxes shrink)
• A future rebalancing will be easier.

It is a completely clean and legal “arrow” in your financial planning quiver.

Who is eligible to reap tax benefits?

Most (but not all) retirees face a similar series of events during retirement that directly impact their chances of good tax planning (e.g. tax harvesting, Roth conversions, etc.). The four common tax planning events that (most) retirees experience are:

• The act of retirement itself.
• Claiming Social Security
• Starting the required minimum distributions
• And the death of the first spouse in a couple.

Why these events?

Because they directly impact a retiree’s tax return, through additional income and/or less room in low tax brackets.

• Retire (usually) decreases taxable income.
• Claiming Social Security is increasing taxable income.
• Starting RMDs is increasing taxable income.
• And the first husband dies reduces the size of your low tax brackets.

Tax profit harvesting is most effective for those with room in their 0% long-term capital gains (LTCG).

In 2025, the 0% LTCG bracket ends at $48,350 for single filers, and at $96,700 for married filers filing jointly. In 2026, those same brackets will end at $49,450 and $98,900, respectively.

A specific example of tax profit harvesting

Let’s look at a typical retired couple in their early sixties. If we go back to our “4 major events”, they are in the following situation:

Let’s say they have $500,000 in a joint taxable investment account, much of which will produce significant capital gains. They have been saving and investing for years.

They also have significant assets in both Traditional ($1.5M) and Roth ($300K) segments.

To do effective tax planning, we need to understand their current and future tax situationS. In other words, we want to know how their annual taxes are likely to evolve over time. Most financial planners use handy tax planning software to do this, but today we’re going to use some rough math.

Their tax situation Now

What does this couple’s tax situation look like today? It’s quite simple.

The lower earner receives $21,000 per year from Social Security.

Their taxable account spits out about $15,000 in income and dividends. Their bank accounts, shall we say, contribute another $2,000 in interest.

…and it is, at least as far as “unavoidable income” is concerned.

However, it’s fair to say that many couples need more than $38,000 in gross income to live. Let’s assume our couple needs another $62,000 per year to meet their lifestyle requirements. That’s $100,000 in total gross income. For simplicity, I’ll assume the $62,000 all comes from traditional IRA distributions [but (!) there is a “right” order to withdraw from your retirement accounts].

If you enter this information into a 1040 tax return, you will see that their federal taxable income is $65,350. This means that:

• Their marginal LTCG tax rate is 0%.
• Their marginal income tax rate is 12%.

Their tax situation In the future

While we don’t have a perfect crystal ball, we do know a few things that will happen in their future.

• The high earner will begin collecting Social Security at age 70, which we assume will add another $40,000 in Social Security income per year.
• RMDs take effect at age 75, with 4-5% of their traditional IRA balance added as guaranteed taxable income. It’s hard to know where their IRA balance will be in ~10 years. But it’s not unreasonable to assume they will be higher.
• Eventually, one of the spouses will die. Lower social security incomes will disappear and their income tax brackets will be halved.

These are not precise guarantees, but they are directionally accurate.

Once the RMDs start, assume they are still filing jointly, they will definitely be in the 22% and 15% LTCG income brackets.

If you are single (after the first spouse dies), they may fall into the 24% + 15% LTCG income bracket.

The point is: they would rather pay taxes now (in the lower brackets) than later.

They are a good candidate for tax planning.

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The actual numbers

We decided that this family should pursue thoughtful tax planning this year.

If you’re curious about whether capital gains harvesting or Roth conversions make more sense… great question!

For this family, harvesting capital gains is the better option.

But how much can they ‘harvest’?

As a reminder, their taxable income this year is $65,350and their 0% LTCG bracket ends at $96,700.

They can realize the difference between these two numbers – €31,350 – in long-term profit and pay €0 tax on it.

That’s big.

Why can’t they reap the full $96,700?!

The most common misunderstanding when harvesting capital gains occurs when people see this table below…

…and they think, “So – as a couple we can realize $96,700 in capital gains, and we pay ZERO taxes?”

That’s not true. It is important to understand how income and capital gains ‘accumulate’.

Ordinary income takes first place, and only then can capital gains pile on top. So very few retirees get the full ‘$0 to $96,700’ headroom to realize a 0% capital gains tax.

Here’s a simple example, from left to right. We look at ordinary income, minus deductions, and then apply income tax. Than stack long-term capital gains on top, Than Apply LTCG tax rates.

The value of harvesting tax benefits

In this case, our couple harvested $31,350 in capital gains at 0% tax and set their basis higher. Without this smart tax planning maneuver, we know some won’t allof that $31,350 would ultimately have been taxed at 15%.

$31,350 x 15% = $4700

Rinse and repeat, year after year. It’s nothing to scoff at!

That’s a reasonable, realistic example of how tax profit harvesting works in practice.

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