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Tax GAIN Harvesting

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  • Tax GAIN Harvesting

    After reading Item #12 on WCI blog this morning in my email inbox... I am pretty sure we should be doing this for our kids, right? I guess the stuff that has appreciated less than 40K and you plan to use for college, then no? But if they plan to have that account for a long time, they are not earning much money (my kids earned ~$5000 in earned income this year, should we do it? Should we just do it yearly or wait until the year before they get out of college (before they start earning a pretty go salary)? This is the first I have heard about this. Anyone have any strategies on this?

  • #2
    If they are in a non-existent / low tax bracket or someone's willing to front the bill then absolutely.

    Also I'm assuming that money is being used to fill up a Roth IRA?

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    • #3
      Are your kids adults/filing their own taxes?

      Tax gain harvesting only works if the person has some taxable unrealized gains and currently in a really low/no tax bracket. Then expect to be in a higher tax bracket later.

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      • #4
        Tax gain harvesting should generally be done to the top of the 0% capital gains tax bracket.

        This might be quite small if they are subject to the Kiddie Tax (2021 = $2200 - ordinary income).

        Still it represents a lost opportunity cost of a tax-free basis increase. Over twenty years this could amount to ~$40K basis increase.

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        • #5
          Will state taxes affect this?

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          • #6
            Yes, they can. Some states do not follow federal tax policy on capital gains. As always when it comes to state taxation YMMV.

            For instance, I believe CA taxes all capital gains as ordinary income, but I do not know the impact. On the other hand my state taxes interest & dividends, but does not tax capital gains.

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            • #7
              Originally posted by Peds View Post
              If they are in a non-existent / low tax bracket or someone's willing to front the bill then absolutely.

              Also I'm assuming that money is being used to fill up a Roth IRA?
              I "mommy match" their wages and put into Roth. They don't tend to spend a ton (especially during the pandemic)... just turned 16 so using for gas and the occasional fast food or escape room. They keep some of their money in savings and put anything they don't plan to use into a UTMA fund, have about $10K each in there, of their own funds. (About the same in the Roth, but I helped with that).

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              • #8
                Originally posted by SLC OB View Post

                I "mommy match" their wages and put into Roth. They don't tend to spend a ton (especially during the pandemic)... just turned 16 so using for gas and the occasional fast food or escape room. They keep some of their money in savings and put anything they don't plan to use into a UTMA fund, have about $10K each in there, of their own funds. (About the same in the Roth, but I helped with that).
                Does the roth affect kid's financial aid when going to college and applying for loans?

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                • #9
                  Income only if withdrawn. Not if the Roth funds aren’t used.
                  https://www.google.com/amp/s/www.mar...-qa-2016-03-18

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                  • #10
                    This is a hard question. Who knows what their finances are going to look like in 5, 10, 20 years.

                    I did a bunch of tax gain harvesting in residency (from investments in a prior life) b/c I was in a low tax bracket and then I made it to attending hood and realized I didn't need that much and ended up putting a large part of that taxable brokerage account into a DAF. So in in retrospect I paid a small tax bill and I really didn't need to be paying b/c I ended up donating the money anyway.

                    That being said, if you are planning on having them spend the money for room and board or college tuition then sure you should use this time to tax gain harvest ro reduce the basis prior to the expected sell date.

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                    • #11
                      No brainer to tax gain harvest in 0% federal tax bracket. State taxes will be paid but the benefit is too good to pass up

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