Author Topic: Adjusting Cost Basis at the High?  (Read 3371 times)

Gimesalot

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Adjusting Cost Basis at the High?
« on: July 13, 2016, 08:11:32 AM »
So I realized that we are at an all time market high right now.  At this point, does it make sense to sell and rebuy in my 401k, trad. IRA, & HSA?  My thought is that since I don't have to pay tax on these "gains," I should sell and buy back to increase my cost basis on paper, so when I sell I pay less in taxes.

Does this make sense?
« Last Edit: July 13, 2016, 08:31:55 AM by Gimesalot »

Jack

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Re: Adjusting Cost Basis at the High?
« Reply #1 on: July 13, 2016, 09:00:06 AM »
No, it does not make sense.

When you eventually start taking distributions from your tax-deferred accounts they will be taxed as ordinary income and the cost basis will be irrelevant.

seattlecyclone

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Re: Adjusting Cost Basis at the High?
« Reply #2 on: July 13, 2016, 12:33:21 PM »
Yes, cost basis is irrelevant within your tax-advantaged accounts. Don't worry about it.

MustacheAndaHalf

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Re: Adjusting Cost Basis at the High?
« Reply #3 on: July 13, 2016, 04:08:17 PM »
Buying/selling in a 401(k) doesn't change your cost basis - only contributions do.

But a taxable account plus a low tax bracket could have an opportunity.  For those in the 15% tax bracket, you have a special long-term capital gains tax rate of 0%.  So in a taxable account you could sell and realize taxable gains at a 0% rate.  Unlike a wash sale, the IRS lets you realize gains despite buying/selling within 31 days.

johnny847

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Re: Adjusting Cost Basis at the High?
« Reply #4 on: July 13, 2016, 04:18:07 PM »
But a taxable account plus a low tax bracket could have an opportunity.  For those in the 15% tax bracket, you have a special long-term capital gains tax rate of 0%.  So in a taxable account you could sell and realize taxable gains at a 0% rate.  Unlike a wash sale, the IRS lets you realize gains despite buying/selling within 31 days.

Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

beltim

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Re: Adjusting Cost Basis at the High?
« Reply #5 on: July 13, 2016, 04:37:34 PM »
But a taxable account plus a low tax bracket could have an opportunity.  For those in the 15% tax bracket, you have a special long-term capital gains tax rate of 0%.  So in a taxable account you could sell and realize taxable gains at a 0% rate.  Unlike a wash sale, the IRS lets you realize gains despite buying/selling within 31 days.

Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

Definitely not all.  Check your state.

johnny847

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Re: Adjusting Cost Basis at the High?
« Reply #6 on: July 13, 2016, 04:39:12 PM »
But a taxable account plus a low tax bracket could have an opportunity.  For those in the 15% tax bracket, you have a special long-term capital gains tax rate of 0%.  So in a taxable account you could sell and realize taxable gains at a 0% rate.  Unlike a wash sale, the IRS lets you realize gains despite buying/selling within 31 days.

Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

Definitely not all.  Check your state.

Which state(s) is/are exceptions? I hate the ambiguities in my statements on the matter.

Parkingmeter

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Re: Adjusting Cost Basis at the High?
« Reply #7 on: July 13, 2016, 04:45:47 PM »
Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

Definitely not all.  Check your state.

Which state(s) is/are exceptions? I hate the ambiguities in my statements on the matter.

 Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming are the states that have no general income tax or tax on dividends/investment income.

johnny847

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Re: Adjusting Cost Basis at the High?
« Reply #8 on: July 13, 2016, 04:51:00 PM »
Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

Definitely not all.  Check your state.

Which state(s) is/are exceptions? I hate the ambiguities in my statements on the matter.

 Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming are the states that have no general income tax or tax on dividends/investment income.

Notice how I said most (all?) states that have income tax. You just listed all the states that don't have income tax period, which are already excluded from my statement.

beltim

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Re: Adjusting Cost Basis at the High?
« Reply #9 on: July 13, 2016, 05:33:06 PM »
But a taxable account plus a low tax bracket could have an opportunity.  For those in the 15% tax bracket, you have a special long-term capital gains tax rate of 0%.  So in a taxable account you could sell and realize taxable gains at a 0% rate.  Unlike a wash sale, the IRS lets you realize gains despite buying/selling within 31 days.

Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

Definitely not all.  Check your state.

Which state(s) is/are exceptions? I hate the ambiguities in my statements on the matter.

The only one I know of is Massachusetts, which has short-term capital gains tax of 12% and long-term of 5.15%

http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/tax-rates.html

johnny847

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Re: Adjusting Cost Basis at the High?
« Reply #10 on: July 13, 2016, 05:44:10 PM »
But a taxable account plus a low tax bracket could have an opportunity.  For those in the 15% tax bracket, you have a special long-term capital gains tax rate of 0%.  So in a taxable account you could sell and realize taxable gains at a 0% rate.  Unlike a wash sale, the IRS lets you realize gains despite buying/selling within 31 days.

Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

Definitely not all.  Check your state.

Which state(s) is/are exceptions? I hate the ambiguities in my statements on the matter.

The only one I know of is Massachusetts, which has short-term capital gains tax of 12% and long-term of 5.15%

http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/tax-rates.html

Nice. Thanks!

ETA: Wow considering their marginal normal income tax rate is 5.25%, that's some really unfavorable treatment of short term capital gains.


Wait but this is still not an example of a state that has a favorable tax treatment of long term capital gains. LTCG are taxed at 5.15% by MA. Normal income is also taxed at 5.15%.

That's equal treatment, not favorable.
« Last Edit: July 13, 2016, 05:53:19 PM by johnny847 »

beltim

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Re: Adjusting Cost Basis at the High?
« Reply #11 on: July 13, 2016, 05:54:45 PM »
But a taxable account plus a low tax bracket could have an opportunity.  For those in the 15% tax bracket, you have a special long-term capital gains tax rate of 0%.  So in a taxable account you could sell and realize taxable gains at a 0% rate.  Unlike a wash sale, the IRS lets you realize gains despite buying/selling within 31 days.

Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

Definitely not all.  Check your state.

Which state(s) is/are exceptions? I hate the ambiguities in my statements on the matter.

The only one I know of is Massachusetts, which has short-term capital gains tax of 12% and long-term of 5.15%

http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/tax-rates.html

Nice. Thanks!

ETA: Wow considering their marginal normal income tax rate is 5.25%, that's some really unfavorable treatment of short term capital gains.


Wait but this is still not an example of a state that has a favorable tax treatment of long term capital gains. LTCG are taxed at 5.15% by MA. Normal income is also taxed at 5.15%.

That's equal treatment, not favorable.

It favors long-term capital gains over short-term capital gains.  Wasn't that the question?

johnny847

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Re: Adjusting Cost Basis at the High?
« Reply #12 on: July 13, 2016, 06:00:21 PM »
But a taxable account plus a low tax bracket could have an opportunity.  For those in the 15% tax bracket, you have a special long-term capital gains tax rate of 0%.  So in a taxable account you could sell and realize taxable gains at a 0% rate.  Unlike a wash sale, the IRS lets you realize gains despite buying/selling within 31 days.

Yes but most (all?) states that have income tax don't have favorable tax treatment of long term capital gains. If you do live in such a state then this tax gain harvesting isn't free. It doesn't necessarily mean it's a bad idea to do so though - just that state taxes should also be considered.

Definitely not all.  Check your state.

Which state(s) is/are exceptions? I hate the ambiguities in my statements on the matter.

The only one I know of is Massachusetts, which has short-term capital gains tax of 12% and long-term of 5.15%

http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/tax-rates.html

Nice. Thanks!

ETA: Wow considering their marginal normal income tax rate is 5.25%, that's some really unfavorable treatment of short term capital gains.


Wait but this is still not an example of a state that has a favorable tax treatment of long term capital gains. LTCG are taxed at 5.15% by MA. Normal income is also taxed at 5.15%.

That's equal treatment, not favorable.

It favors long-term capital gains over short-term capital gains.  Wasn't that the question?

Ah I see how that was confusing. I meant favorable compared to normal income, not compared to short term.

beltim

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Re: Adjusting Cost Basis at the High?
« Reply #13 on: July 14, 2016, 10:45:24 AM »
It favors long-term capital gains over short-term capital gains.  Wasn't that the question?

Ah I see how that was confusing. I meant favorable compared to normal income, not compared to short term.

What does normal income have to do with tax gain harvesting?

johnny847

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Re: Adjusting Cost Basis at the High?
« Reply #14 on: July 14, 2016, 10:48:01 AM »
It favors long-term capital gains over short-term capital gains.  Wasn't that the question?

Ah I see how that was confusing. I meant favorable compared to normal income, not compared to short term.

What does normal income have to do with tax gain harvesting?

Well if you're paying taxes to tax gain harvest, then it's not such a good deal. If you're at least paying less to tax gain harvest compared to normal income, it tips the scales towards engage in tax gain harvesting.

beltim

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Re: Adjusting Cost Basis at the High?
« Reply #15 on: July 14, 2016, 11:30:12 AM »
It favors long-term capital gains over short-term capital gains.  Wasn't that the question?

Ah I see how that was confusing. I meant favorable compared to normal income, not compared to short term.

What does normal income have to do with tax gain harvesting?

Well if you're paying taxes to tax gain harvest, then it's not such a good deal. If you're at least paying less to tax gain harvest compared to normal income, it tips the scales towards engage in tax gain harvesting.

Why?  The tax on normal income has literally nothing to do with this decision.

ender

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Re: Adjusting Cost Basis at the High?
« Reply #16 on: July 14, 2016, 11:38:25 AM »
I'm not sure what capital gains has to do with anything for this situation?

So I realized that we are at an all time market high right now.  At this point, does it make sense to sell and rebuy in my 401k, trad. IRA, & HSA?  My thought is that since I don't have to pay tax on these "gains," I should sell and buy back to increase my cost basis on paper, so when I sell I pay less in taxes.

Does this make sense?

Cost basis for your funds doesn't matter inside tax protected accounts.

beltim

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Re: Adjusting Cost Basis at the High?
« Reply #17 on: July 14, 2016, 11:51:36 AM »
I'm not sure what capital gains has to do with anything for this situation?

So I realized that we are at an all time market high right now.  At this point, does it make sense to sell and rebuy in my 401k, trad. IRA, & HSA?  My thought is that since I don't have to pay tax on these "gains," I should sell and buy back to increase my cost basis on paper, so when I sell I pay less in taxes.

Does this make sense?

Cost basis for your funds doesn't matter inside tax protected accounts.

Yeah, this is all a sidebar based off of mustaches comment, it's not relevant to the OP's situation.

johnny847

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Re: Adjusting Cost Basis at the High?
« Reply #18 on: July 14, 2016, 12:13:25 PM »
It favors long-term capital gains over short-term capital gains.  Wasn't that the question?

Ah I see how that was confusing. I meant favorable compared to normal income, not compared to short term.

What does normal income have to do with tax gain harvesting?

Well if you're paying taxes to tax gain harvest, then it's not such a good deal. If you're at least paying less to tax gain harvest compared to normal income, it tips the scales towards engage in tax gain harvesting.

Why?  The tax on normal income has literally nothing to do with this decision.

Yeah sorry, I really shoudln't be comparing it to normal income. I should be comparing it to zero. It's just that most states don't tax LTCG at favorable rates, so unless the state doesn't have an income tax period, chances are if your state has an income tax it won't have a 0% LTCG tax rate.