Tax Gain Harvesting, Higher Interest Rates for Savers, Capital Gains Exclusion

Tax Gain Harvesting

Ava wrote in:

"I feel like a lot of your guests talk about tax gain harvesting as something to do only when they quit their jobs and have no income, but I took advantage of it while I was still working.

When I was making about $50,000 in 2020, the taxable income limit for getting the 0% long term capital gains rate was $40,400 for single filers. The key word here is taxable income. I took $50k of gross wages and subtracted the $12,400 standard deduction for a single person and my taxable income went down to $37,600.

I also realized I could reduce my taxable income even further by maxing out my 401k which reduced my taxable income by another $19,500.

My taxable income was now only about $18,100 - meaning that I could sell and rebuy appreciated stocks and mutual funds in my brokerage account and not pay any federal taxes on about $22,300 of long-term capital gains in 2020.

I did this for a few years while I was making a sufficiently low income to get under the threshold. Given the 401k max and the standard deduction I would encourage any single person making less than maybe $75,000 gross to investigate it before the end of the year to see if this could work for them and their situation."

Here’s an article from CNBC showing the taxable income limits for the 0% capital gains tax rate for 2022 and 2023 for those filing single and married filing joint.

Remember to subtract the standard deduction and another other deductions you have from your total income, such as 401k contributions, to determine how much room you have for 0% tax gain harvesting.

Higher Interest Rates for Savers

For the first time in many years, we’re seeing interest rates on savings accounts that are actually quite attractive! Obviously, there are many negatives of a high interest rate environment for borrowers, but on the flip side, the silver lining is savers are rewarded with higher interest rates on our cash deposits.

The "best" rates are fluctuating daily and it’s hard to keep on top of the best offer at any given moment, but as of the writing of this email on 11/7, I’m seeing 3.5% APY at two banks I don’t know much about called Salem Five Direct and Dollar Savings Direct.

While I can’t vouch for them directly, I’m keeping my eye on the top rates and will keep you updated.

Coming in right behind the 3.5% those banks are offering are two places where I do personally have accounts and can vouch for:  Wealthfront Cash Account is offering 3.3% APY and CIT Bank’s Savings Connect account is at 3.25% APY.

NOTE: All interest rate information accurate as of 11/8/2022 when this email was sent. Please confirm accuracy in the future when you are reading this!!

Capital Gains Exclusion

Valerie wrote in: "On episode 403, Scott Rieckens mentioned something at the 1 hour 1 minute 30 second mark about lowering their capital gains on their house by getting a new mortgage every 2 years??? Is this something that people can do?"

I wrote back:

"Scott said something in passing and what he meant was true, but I could see how it sounded like what you interpreted!

You get a capital gains exclusion on SELLING your primary residence if you have lived there for 2 of the previous 5 years. So, the 2-year mark is important. If they had an unrealized capital gain in their home and sold it after the 2-year mark they would have $0 in tax (if the cap gain was less than $500k for married couples filing joint. $250k for single filers.).

So, it isn't for getting a new mortgage or refinancing certainly, but on selling your primary residence."

(I wrote a more in-depth section about the Capital Gains Exclusion earlier this year)

ChooseFI Community Taking Action This Week

• Alex said, "You know, it's a funny thing. All these years, I have never automated my credit card payments until this week. I used to have credit card debt problems before going down the FIRE path, and lived in fear of missing a payment: so ironically, I *didn't trust* the automated payment system! I always paid my balance in full (once I broke out of that initial debt), but I wanted to be the one pushing the button every time. This week my 1% better was to finally let that go and have it automatically pay it off so that it's one less thing for me to remember to do every month. As silly as it sounds, I'm a bit nervous for the first time the due date comes and goes, but logically I know it's the smart move! So I think this will improve my life once I let go and let automation work its magic."
• Lacey said, "My 1% better this week is realizing that my husband and I have access to health insurance through his veteran military benefits. We've been covered by my employer-provided insurance for so long that I hadn't even thought about it. We'll be switching to Tricare in the next few months and saving $250/month! Way better coverage too. Makes FI one step closer and figures out the insurance predicament later on. Woo!"
• Doug said, "Just listened to episode 394 and signed up to donate blood next week. It has been about 1.5 years since I last donated and listening reminded me of the importance of donating blood. I used to donate regularly pre-Covid but fell out of the routine. I now plan to restart."
• Lindsay said, "I have a 1% to share: RESEARCH what jobs you could apply for and see what you can really get paid. I always undervalue myself. Then take a leap and go after it. Salary offerings in my field seem to have gone up a good bit in recent years and after reading over and over that I met all requirements for many many job offerings, I went to my boss and told her I needed a raise (a major one) or I had to move on. (Only do this if you really are prepared to move on.) I saw that I really have undervalued myself and got a 35% raise because I believed in myself with backup and research to prove it. You may have to find a new job, but you are WORTH IT."
• Sean said, "During last year's extremely hot job market my company instituted an increased referral bonus program in search of talent. Around the same time, my college also reached out to alums looking for entry level opportunities for graduating seniors and recent grads. I put together a document describing my company, the various jobs, desired qualifications, benefits, etc. for the career planning center, and spoke with lots of recent grads/graduating seniors before passing along (most of) their resumes to HR. One recent alum ended up getting hired. In true ChooseFI fashion, I thought "I already have this document created, why not disseminate it further?" So I reached out to the career centers at several other "sister" colleges, talked with lots of graduates, and recently just received the payout for my third referral staying the requisite 6 months, with another having her first interview last week! An added bonus on top of the referral money ($9k so far) and helping new graduates get their first jobs has been that through these talks, I've honed a pitch about "what I do" that will help me speak more comfortably in future interviews, should I choose to look elsewhere."
• Jim said, "Thank you for these FI weekly emails. I want to quickly share a master's level house hack that is working great for my wife and me. We are empty nesters. Two years ago we built a new 5 bedroom home two blocks from a football stadium for a large SEC university. We live in the home and enjoy the extra bedrooms when our children and grandchildren come to visit. The hack comes in due to the IRS Section 280A known as the "Augusta Rule" that allows you to rent out your personal residence for up to 14 days per year without needing to report the rental income on our individual tax return. A good football game weekend or graduation can bring in over $2,200 a night, federal income tax free. After expenses and paying the local hotel/motel taxes last year we cleared over $25,000 and only had to be out of our home 14 nights. This covered property taxes, electric, gas, water, and more for the entire year with money left over. We own a cabin out of town that we go to on those weekends. I know this hack is not for everyone but it has worked great for us, allowing us to own a very nice home in a great area and not draining our resources year after year."

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