A yearend tax strategy for lower income taxpayers.
For taxpayers in the 10% and 15% tax brackets (below $36,900 taxable income if single; $73,800 taxable income if married filing a joint return for 2014), the tax rate on long-term capital gains is 0%.
If this is your situation, it may pay to “reset” your tax basis on your securities with long-term gain. The procedure is quite simple – you sell the security thus recognizing the long-term gain. Then you immediately buy it back. You now own the same security with a higher basis.
This is an especially good maneuver for those who expect to be in a higher tax bracket in future years.
There are some caveats.
While you have reset the basis to a higher amount you have also reset the holding period. Any future gain is short-term if you then sell before holding the security for more than one year from the date of repurchase.
There are limits on how much gain this will work for. That’s because while your tax on the long-term capital gain is 0% while you are in the 10% or 15% tax bracket, the gain counts in determining your taxable income and tax bracket. If the gain pushes you into a higher bracket, you will then have to pay tax on the gain.
If you would otherwise qualify for certain tax credits based upon low income, such as the earned income credit, this maneuver may affect the amount of the credit. In that case, you are effectively paying tax on this maneuver.
Lastly, states could still tax this income. It still may be worthwhile to pay state tax to minimize future federal tax, but you should be aware.
Discuss with your tax advisor whether resetting your basis makes sense for you this year.
It’s not too late to do for this year but you must act fast.
