Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

Here's How To Pay 0% In Taxes (ZERO Capital Gains)

• Ari Taublieb, CFP®, MBA • Episode 201

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Can you save thousands on your lifetime tax bill with a simple strategy? Discover how tax gain harvesting can sometimes outperform Roth conversions when it comes to minimizing taxes on your investments. In this episode of the Early Retirement Podcast, I'll break down the nuances between capital gains taxes and ordinary income taxes and provide a practical example involving appreciated stock. Learn how you might pay 0% in capital gains taxes by strategically selling assets, using the capital gains tax brackets and standard deduction to your advantage. We’ll also address a real-life question about capital gains on a house sale, showcasing the broader benefits of tax gain harvesting for those with significant gains in brokerage accounts.

As we wrap up, I'll encourage you to submit your own questions through earlyretirementpodcast.com for future discussions. Sharing your queries helps us provide more tailored advice to our community. Don’t forget the importance of rating, reviewing, and sharing the podcast with others who could benefit from these insights. And remember, while I offer valuable information, consulting with a tax preparer or financial advisor is crucial before making any financial decisions. Tune in and take control of your financial future!

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

I know you don't want to pay more than you need to in taxes, but too often people start discussing Roth conversions the concept that if you've invested well, your 401k or your IRA, if you've moved it from a previous company, is going to keep growing and then in the future you're hit with those required distributions. Now, ideally, we can avoid paying a crazy amount in taxes by doing something called a Roth conversion to essentially minimize your lifetime tax bill. But sometimes there's an even better strategy and that's what I'm going to discuss today. It's called tax gain harvesting. Most of you have heard of tax loss harvesting, but tax gain harvesting can actually be more effective. I'm going to show you an example why.

Speaker 1:

If you don't already know, my name is Ari Taublieb. I am a certified financial planner, I'm the host of the Early Retirement Podcast and I'm the vice president at Root Financial Partners. We're going to hop right in and I'm going to start with a comment from the YouTube channel. Now, if you're listening on the podcast app, I'm going to explain the comment. If you're watching on YouTube, you can see it on your screen. This comes four days ago from Trisha 54. If I'm single and my taxable income is less than 47,000 a year and I sell my house, will I owe 0% in capital gains from the sale? I've lived in the house for 25 years. What an interesting question. Most people don't understand what Trisha's bringing up, not due to competency, but because they've just never heard of it before. And what Trisha is alluding to is called tax gain harvesting, and I'm going to explain an example so you can see what I mean. Let's assume you bought Apple stock for $10,000 and it grew to $100,000. Awesome, that's $90,000 of growth. Now most people just put in their heads I'm going to have to pay capital gains taxes on that, and they're not wrong. But capital gains has a different tax bracket, meaning a different schedule that you have to pay taxes on compared to ordinary income. So ordinary income, that is your traditional 10%, 12%, 22, 24, 32, and so on. That's the marginal bracket system that we have here in the US. Capital gains goes on a different schedule. So I'm going to explain it, but you can also see it on my screen right now.

Speaker 1:

If you want to pay 0% in taxes this is not me misspeaking or making up something from Ozark, that Netflix show. This is real stuff here that too many people ignore. Now let me be clear the tax gain harvesting that I'm going to tell you right now. This only applies if you have a brokerage account. If you're wondering about should I do this in a 401k or a Roth, this is not something you can do. It's only in a brokerage account. So that is an account that you put money into. There's no time constraint, so you can take it out before 59 and a half, but you can pay capital gains taxes. It's a powerful tax technique that too many people overlook.

Speaker 1:

So, for example, you buy Apple stock for $10,000. It's now worth a hundred thousand. That is $90,000 of gains If you are married finally jointly. So the example was single, but I'm going to tell you married finally jointly, because that's most of you, and your income is below $94,050 and you've held the position for over a year. So you buy Apple stock for 10,000 in 2022. Now we're in 2024.

Speaker 1:

Your income is hypothetically $0. Now it's probably not going to be zero. You're going to have interest, you're going to have dividends. I'm just keeping it simple. You buy it for $10. It's worth $100. Well, that's $90,000 of gains. You would pay 0% taxes on that. The next $4,050, you would also pay 0% taxes.

Speaker 1:

It's only once you actually have income above 94,050 that you jump to the 15% capital gains. Most people just default to going, yep, I'm going to have to pay 15% in capital gains. But that's not actually how it works and it's actually missing a step because there's something called a standard deduction. Most of you already know this, but this is a decision you get to make at tax time. Should I take the standard deduction or should I itemize? If I have mortgage interest and big healthcare expenses and charitable giving, itemizing might be more effective. It might minimize your taxes beyond a standard deduction. But if you're taking a standard deduction of, let's just call it, $29,200 and you're adding that to the $94,000, well, that's north of $125,000 that you could generate in tax-free income in retirement.

Speaker 1:

So when does this make sense? Do you have an appreciated stock? Did you buy a stock for $10,000 that's now worth $100,000? Do you have an appreciated stock? Did you buy a stock for $10,000 that's now worth $100,000? Do you have significant gains in a brokerage account? If I see someone come to me with a $3 million brokerage account, on average a million dollars of that is actually cost basis and the rest is growth. Maybe they have Nvidia or Microsoft or Apple or Tesla, and so they want to diversify. They just want to do it intentionally.

Speaker 1:

If this is you, with a healthy amount in a brokerage account as opposed to a Roth IRA or 401k, it can be special. It can almost act like a Roth IRA because you put money in after tax, just like a Roth, it grows. You assume that you have to pay taxes on it. But if you take it out and you're intentional and let's assume you retire at 50, you could hypothetically realize $94,050 plus the standard deduction of about $30,000 and say I'm going to, on purpose, go sell Apple stock, but not a ton of it, just $125,000 so that I can pay 0% taxes. And I'm going to do that every year to make sure you don't pay more than you need to. So it's pretty cool.

Speaker 1:

This is called tax gain harvesting. Most of you are familiar with tax loss harvesting. Tax loss harvesting is if you've bought Apple stock for $5,000 and it grew to $8,000 and you go sell it, you have to pay taxes on that. Now you're paying. Generally, if you have a salary and interest and dividends, you're probably paying 15% in taxes Not the end of the world, but you're paying taxes.

Speaker 1:

But what if you bought Apple stock for $5,000? It's now worth $8,000,. But you also bought Coca-Cola for $5, but it went down in value by 3,000. So now it's only worth two. Well, you have Apple you bought for five. That went up by three to eight. You have Coke that you bought for five, that went down, is worth three. You can offset those and now go invest however you see fit without paying taxes on that. You can offset the gains to the losses. And then you can actually go a step further and go. Yeah, you know I bought Apple, but it actually didn't go up in value. I actually bought Coke and it did go down. And what you can do is go. I know Coca-Cola is down. I'm going to go sell it on purpose, I'm going to capture these losses and then I'm going to buy something equivalent, not Coca-Cola, but I'm going to buy a different stock or a mutual fund. You're on purpose selling to realize a loss and you can use that to offset gains in future years.

Speaker 1:

So the premise of tax planning has to be integrated with investments. Now let's go back to the question. If I'm single and my taxable income is less than $47,000 a year and I sell my home, well, I owe 0% in capital gains. This is not enough detail to give an answer. And the reason what if this person bought their home for $100,000 and now it's worth $10 million? They're going to be paying a lot of taxes because they have huge gains. What if this person is single and they bought the home for $100,000 and now it's worth $200,000? Well, if you've lived in the home for you can see 25 years you're going to actually be able to qualify for the exclusion, which means the $250,000 of gains on your property you don't have to pay.

Speaker 1:

So if you bought it for $100,000 and it's worth $200,000, you just get to sell it for $200,000. If you bought it for $100,000 and it's worth $200,000, you just get to sell it for $200,000. Now, yeah, there's broker fees and commissions and stuff like that, but you don't have to worry about capital gains. But let's get a little more complicated. Let's assume you bought it for $100,000 and now it's worth $300,000. Well, well, well, well, that's $200,000 of gains. Let's go a little harder. What if you bought it for $100,000 and now it's worth $400,000? Well, that's $300,000 of gains. Now, assuming she has no other income, $250,000 of that you don't have to pay taxes on, you get an exclusion, but there's still $50,000 left over. So she might go $50,000 left over. I'm going to pay taxes, but she might not have to because if her income is once again below $47,000, she can pay 0% taxes on long-term capital gains and remember, she has the standard deduction. So 47,000 plus 14,000 is giving us enough income that she will likely pay 0% in taxes. But she probably has interest in dividends and other things. So there might be a little bit, but this is something for her to consider.

Speaker 1:

The next comment here is someone who says from Bill Nardo 1554, do you recommend tax loss harvesting in retirement? Oftentimes it can be a good tool if you have a brokerage account, but often it's really not as important as tax gain harvesting, which is often not discussed. I know I just said often three times, so I'll stop saying that as often you like that. Okay, I know it's a often three times, so I'll stop saying that as often you like that. Okay, I know it's a bad joke. Next one this comes from Mr E, who says on a previous video I mentioned this topic and look at this I recently realized that 94,000 of capital gains will be tax-free.

Speaker 1:

We are retired at 49 and have cash brokerage, pension and Roth. Coincidentally, we have 400,000 in an unrealized gain position in Apple. My plan is to sell $94,000 the next few years to pay $0 in taxes and roll the proceeds into VOO. Then our pension kicks in. We'll cover most of our expenses. We withdraw 2.5% and that will fund our retirement for 50 years and still die with more money than we have.

Speaker 1:

I just gave you an example, before I even read this, of exactly what this person is going to do. An awesome job of this person isn't worried about Roth conversions. Now, I don't know how much they have in an IRA or 401k and we always want to understand what's going to put more money into our pocket. Is it doing Roth conversions or is it doing tax gain harvesting? So should we pay 0% in taxes, which is very attractive, or should we do Roth conversions? Sometimes it's going to make sense to conversion, sometimes harvesting.

Speaker 1:

The real value in working with an advisor is to help you determine that. If you're looking for more guidance like this, check out the Early Retirement Academy so you can run your own projections and start to figure this out. If you want to work with an advisor for these big, big I'll call them surgical type financial moves oftentimes you want to make sure you're doing it right. I know I said often. Again, I'm going to stop saying that. That is it for this episode. Short and sweet, more technical, but hopefully helpful regarding tax planning for an early retirement.

Speaker 1:

Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom that's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.