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Reset Cost Basis Higher By Realizing Capital Gains

Reset Cost Basis Higher By Realizing Capital Gains

2013 is coming to an end. It’s been a great year for the stock market. For those in the 10% and 15% tax brackets, you may want to realize some long term capital gains to reset your cost basis higher and take advantage of the special 0% tax rate on long term capital gains.

To qualify for the special 0% long term capital gains tax in 2013, you must have a taxable income before any capital gains under $36,250 if you are single, under $72,500 if you are married filing jointly.

Note these numbers are taxable income. If you add back pre-tax deductions from your paychecks (401k, health care, flexible spending accounts), personal exemptions ($3,900 per person including dependents), above-the-line deductions, standard deduction ($6,100 single, $12,200 married filing jointly), and itemized deductions if higher than standard deduction, the actual gross income cutoff for this benefit is much higher: probably more than $50k single and more than $100k married filing jointly.

I would say more than half of the people in the country qualify.

To take advantage of the special 0% tax rate on long term capital gains, sell some investments with unrealized long term capital gains and immediately buy them back. There is no wash sale on realizing gains. Your cost basis will reset higher, which means you will pay less in taxes in the future.

You will want to realize just enough long term capital gains so that when the gains are added to your other income and after subtracting the exclusions, exemptions, and deductions, your taxable income still stays right below the cutoff: $36,250 (single), $72,500 (married filing jointly).

If you accidentally overshoot a little, it’s not a big deal. Only the amount above the cutoff gets taxed at 15%. The vast majority of your realized gains are still taxed at 0%.