The Ghost of Munny Yet to Come
Two years after I wrote a couple posts about money- The Ghost of Munny Past and The Ghost of Munny Present-an astonishing discovery has prompted me to finally complete the cycle.
But before I get to the meat, how have the past two years gone?
Pretty good. My investment gains are keeping pace with my spending, which is convenient. Most of my stocks have been winners (or at least not losers), although I’m surprised by the amount of turnover in my portfolio. And gold has been a surprisingly good call. Overall, I’m quite happy... at least at this precise moment in time.
But what I really want to share with you is a windfall that’s so big, I can only compare it to when I discovered how to cash out of my 401k / IRA without paying any income taxes. It’s the same level of jaw-dropping awesomeness.
And it comes in two parts.
It began when I needed to look up capital gains tax rates. Short-term gains from stocks held less than a year are taxed at the same rate as regular income, and I thought long-term gains were taxed at a single flat rate.
But I was wrong; long-term capital gains are taxed at three graduated rates based on your income, and at low income levels, the long-term capital gains tax rate is 0%!
That’s right: so long as your total income is less than $39,375, you pay no federal tax at all on long-term capital gains! Better still, your $12,200 standard deduction also factors into your income, which means that 0% tax rate still applies for people with incomes up to $51,575!
If, like me, you have unrealized profits from long-term investments, but negligible income because you’re between jobs, this means you can sell your stock and pocket the entire proceeds without paying any federal tax on it! If you sold stocks that had appreciated by $30,000, that would save you $4,500 at the basic 15% tax rate, or $6,000 at the higher-income 20% tax rate. That’s an absolute steal!
“But Orny,” you say, “I want to keep my investments. I don’t want to sell them, especially the ones that are making lots of money!”
Such a deal I have for you!
Here’s what you do: sell your appreciated stock, then just buy an equal number of shares to open a new position. That way, you recognize the profit now, while you can take advantage of that mindblowing 0% capital gains tax rate, but continue to stay invested. It’s called a “wash sale”.
The newly-purchased shares will have a new, higher cost basis, which reduces any capital gains tax due when you eventually close that position. Aside from trading fees, the only drawback is that you also reset the timer on how long you’ve owned that position, so the new shares become a short-term investment until you’ve held them for a full year.
“But wait a minute,” you say, “aren’t there tax laws that forbid selling and buying the same stock within 30 days?”
Yes, there are; but here’s the second bit of jaw-dropping awesomeness: the federal wash sale rule only applies to investments sold at a loss! Because you accrue tax benefits when you lose money on an investment, the IRS doesn’t want people monkeying around and taking artificial losses. But they only care when you're selling an investment at a loss; the wash sale rule doesn’t apply at all when selling an investment at a profit!
So go ahead: sell your winners, pay zero taxes on the capital gains, then turn around and repurchase the shares at a higher cost basis if you want. It’s all completely kosher!
Like my tax-free 401k trick, this windfall is only open to people with low incomes, but if you qualify, it’s a flabbergasting opportunity that you shouldn't ignore.
Honestly, these unexpected benefits of unemployment are a persuasive argument to never go back to work again!