0:00

you worried about taking the tax hit on your

0:02

investment gains and unsure what to do? Well, in

0:04

today's episode, I'm to share a very simple framework

0:06

that will show you when, or even if, you

0:08

should realize those gains and the way you should

0:10

go about doing it. This

0:13

is another episode of Ready for Retirement. I'm your host

0:16

James Cannell, and I'm here to teach you how to

0:18

get the most out of life with your money. And

0:20

now, on to the episode. As

0:24

part of this episode, I'm gonna share with you

0:26

simple ways that you can pay nothing in taxes

0:28

on some of these gains. This is from simple

0:30

things, like taking full advantage of the 0 % long

0:32

-term capital gain tax bracket, creative ways to gift

0:34

money to charity to offset the tax impact, gifting

0:36

money to children so they can realize some of

0:39

the gains at their tax bracket, understanding when you

0:41

get a step up in basis on your unrealized

0:43

gains, and also understanding how tax loss harvesting can

0:45

help to offset some of this. So I'll talk

0:47

about some of those, but before I do so,

0:49

I wanna go through the general framework of how

0:51

you should even think about the gains that you

0:53

have in your portfolio. You've invested in something that's

0:55

grown, and now you're stuck wondering what

0:57

do I do? Do I take the tax

0:59

hit? Or do I keep it

1:02

going to avoid taxes and maintain the same

1:04

investment exposure that I already have? In

1:06

just in case it's not already obvious, what

1:08

I'm talking about specifically is gains in

1:10

a brokerage account. Not an IRA, a Roth

1:12

IRA, a 401K. All of those gains

1:14

are either tax -free or tax -deferred. I

1:16

am talking about gains on things held in

1:18

a brokerage account where anything that you

1:20

realize, any gain that you realize is potentially

1:22

subject to taxes. So to start,

1:24

let's go through the framework of when should

1:27

you hold on to your investment and avoid paying

1:29

gains versus when should you sell your investment

1:31

and pay taxes on those gains and we'll do

1:33

this framework or we'll go through this framework

1:35

before going to some of the ways that you

1:37

can creatively pay nothing in taxes potentially depending

1:39

on your situation. So let's start by looking at

1:41

an example. Let's assume that you put money

1:44

into an investment and you've put a total of

1:46

$100 ,000 into this investment. It's now

1:48

worth $500 ,000. There's

1:50

$400 ,000 of unrealized gains here. And if

1:52

you sell this, those gains are going to

1:54

be taxable. How do you determine what

1:56

you should do here? Well, number one, let's

1:58

start with when shouldn't you sell that investment?

2:00

There's not always the case to sell

2:02

and pay taxes if we can avoid doing

2:04

so or if there's no need to

2:06

do so. If that $500 ,000 investment, so

2:09

that investment that has 400 % gains in

2:11

it, if you have that investment and you

2:13

look at your portfolio and you know

2:15

what your portfolio needs to do for you

2:17

and you understand or you see that

2:19

this specific investment is a critical part of

2:21

that portfolio, there's not necessarily a need

2:23

to sell. If that gain is there

2:25

and this is still a core part of your portfolio

2:28

and you're not overweight, so for

2:30

example, The instance I see quite a bit

2:32

is people who have invested in large

2:34

tech stocks. This could be a fund, whether

2:36

an ETF or a mutual fund that

2:38

invests in large cap growth stocks, which tend

2:40

to be technology stocks, or it could

2:42

be individual holdings. Maybe you purchased Amazon or

2:44

Tesla or Microsoft or any of these

2:46

investments have done quite well over the past

2:48

five, 10, 15 plus years and you

2:50

have a significant gain in them. If you

2:52

look at that specific investment and you

2:55

say this investment plays a critical role in

2:57

my portfolio. and I have a well -diverse

2:59

portfolio designed to meet my needs and

3:01

this investment plays a critical role in it,

3:03

maybe you don't necessarily need to realize

3:05

those gains. However, if

3:07

you look at this investment and say it

3:09

is significantly overweight or it does not play

3:11

a role in my portfolio, that's where you

3:14

have to understand the risk of both action

3:16

and inaction. So what do I mean by

3:18

that? Well, the risk of action, in this

3:20

case, selling. So for example, maybe you have

3:22

all of your money to use an extreme

3:24

example in one single stock. I don't care

3:26

how well that stock is done, it is

3:28

incredibly risky if all of your net worth

3:30

is in one single stock or all of

3:33

your portfolio is in one single stock, specifically

3:35

as you approach retirement. If you are that

3:37

individual in that example, we have to understand

3:39

what is your maximum downside by selling and

3:41

realizing all of your gains. Well,

3:43

the maximum downside is you pay full

3:45

taxes on the gains. Depending on what

3:47

state you're in, that's going to be

3:50

different. At the federal level, there is

3:52

a 0 % a 15 % and a

3:54

20 % long -term capital gain tax bracket,

3:56

as well as a net investment income

3:58

tax when your income exceeds certain thresholds.

4:00

So at the federal level, if we're

4:02

just looking at federal long -term capital

4:05

gain tax rates, the maximum impact is

4:07

20%, 20 % haircut, not on the entirety

4:09

of what you sell, but on the

4:11

gains. So if we use

4:13

another example, maybe you purchased something

4:15

for $60 ,000 and it's now worth

4:17

$100 ,000. If you sell it

4:19

all, that's a big gain. That's a

4:21

67 % appreciation from the 60 ,000 that

4:23

you had growing to 100 ,000. You're

4:25

not paying 20 % taxes on everything. You're

4:28

paying 20 % taxes on the gains

4:30

at the maximum, potentially 15 % if you're

4:32

not on the max tax bracket there.

4:34

So in this example, a 20 %

4:36

tax on those $40 ,000 of gains would

4:38

be $8 ,000. So if you sell

4:40

your investment, if you sold all of

4:42

it, that would turn from $100 ,000 into

4:44

$92 ,000 in this case. So that's

4:46

not fun. That's not fun to know

4:48

that you're going to lock in a

4:51

loss, but let's look at the alternative. What

4:53

if this $100 ,000 is in one single

4:56

stock? And that single stock has a lot

4:58

of gains in it, and that prevents you from selling. You don't

5:00

want to have to pay any of the taxes. Well,

5:02

now all of a sudden, that stock declines. 40%,

5:05

50%, 60%, 70%. The good news

5:07

is you probably no longer have

5:09

a tax liability. The bad

5:11

news is, you've lost 70 % of your investment

5:13

in that extreme case. So when you look

5:15

at potential outcomes, what we have to understand

5:17

is that sometimes I see people avoiding selling

5:19

an investment because they're avoiding that tax hit.

5:21

That tax hit is very tangible. They know

5:23

it exists. They know what they're going to

5:25

pay. What they're not quite taking

5:27

into account is, what's the risk of not doing

5:29

this? The risk of not doing this, in

5:32

many cases, is significantly greater than the tax liability,

5:34

the tax that they're going to pay. And

5:36

so keep that in mind. Start with understanding what

5:38

are the real risks here. Just because you

5:40

have a long -term gain doesn't mean you have

5:42

to sell. In many cases, it's

5:44

a great strategy to keep that investment,

5:46

keep that fund as part of your

5:48

overall portfolio and avoid gains. But

5:51

if this begins to make up too much

5:53

of your portfolio or you're heavily overly concentrated,

5:55

there's tremendous risk there and we can't lose

5:57

sight of the fact that a downturn will

5:59

be far more detrimental to you in that

6:01

case than simply realizing some of the tax

6:03

would be. So that's a basic framework of

6:05

how should you think about this. Now let's

6:07

look at some specific strategies that could eliminate

6:10

this tax bill altogether. The

6:12

first strategy is fully utilizing the 0

6:14

% long -term capital gain threshold, the

6:16

long -term capital gain tax bracket. A

6:18

lot of people think long -term capital

6:20

gains, I'm either paying taxes at 15

6:22

% or 20%. And for a lot

6:24

of people, that's true. But

6:27

if your taxable income is under

6:29

certain thresholds, you have a

6:31

0 % tax bracket that you

6:33

can take advantage of to realize

6:35

long -term capital gains and qualified

6:37

dividends. Now, qualified dividends I'm

6:39

going to set aside because you can't

6:41

control the timing of when you receive

6:43

these dividends, but you can't control the

6:45

timing of when you realize a long

6:48

-term gain. For 2025, if your taxable

6:50

income is under $96 ,700, you

6:52

are in a 0 % long -term capital

6:54

gain tax bracket. Meaning, any long -term

6:56

capital gain you realize up until

6:58

that threshold is taxed at 0%. Anything

7:00

above that threshold is in taxed

7:02

at 15, and there's another threshold where

7:04

anything above that is taxed at

7:06

20%. If you are single, those numbers

7:08

are exactly half. $48 ,350 is the

7:10

taxable income threshold under which you

7:12

pay 0 % federal taxes on long -term

7:14

capital gains. Now, be mindful of

7:16

what I'm saying here. Taxable income. not

7:18

adjusted gross income, but your taxable

7:20

income. The difference is if you start

7:22

with your adjusted gross income and

7:24

then you take a deduction, either your

7:26

standard deduction, which are 2025 is

7:28

15 ,000 if you're single, 30 ,000 if

7:30

you're married, finding jointly, even more

7:32

if you're 65 or older. What you

7:34

do is you take your adjusted

7:36

gross income, remove or deduct your deduction,

7:38

and then what you're left with

7:40

is your taxable income. So this is

7:42

actually good news. If you're married,

7:44

finding jointly and have the standard deduction,

7:46

You're adjusted gross income, and there's

7:48

some nuance here, and there's some details

7:50

that definitely could change this. I'm

7:52

just saying this for some perspective, not

7:54

to say this is a hard

7:56

and fast number that you should use

7:58

because there are some details that

8:01

impact this, but an adjusted gross income

8:03

of 126 ,700 or less, generally speaking,

8:05

you're going to be in that

8:07

0 % federal tax bracket. Not a

8:09

0 % tax bracket for ordinary income,

8:11

so things like interest that you receive,

8:13

IRA distributions, part of your social

8:15

security. That's all tax or ordinary income

8:17

rates. This is specifically for long -term

8:19

capital gains. So can you utilize

8:21

that? Can you leverage that? Can you

8:23

take advantage of being in that

8:25

tax bracket? And something that most people

8:27

do or many people do is

8:29

they might have gains that exceed that

8:31

limit. So they say, okay, I

8:33

have $100 ,000 of gains in my

8:35

investment account. I am maybe, let's say

8:37

for a simple math, $50 ,000 under

8:39

that threshold. Well, if I realize

8:41

all 100 ,000 of these gains this

8:43

year, 50 ,000 of them will be

8:45

tax -free, but the other 50 ,000 will

8:47

be taxed at the 15 % rate.

8:50

Great. Do you realize half of the gains

8:52

this year, and you realize the other half

8:54

of the gains the following year? How can

8:56

you be strategic about the timing when you

8:58

realize those gains so that even if you

9:00

have some pretty significant gains, can you potentially

9:02

pay 0 % taxes on those by utilizing the

9:04

0 % tax brackets? Another thing that you

9:06

can do to offset some of the taxes

9:08

you would owe in a long -term capital gain,

9:10

and keep in mind everything I'm talking about

9:12

in this episode is a long -term capital

9:14

gain. Short -term capital gains, those

9:16

are to ordinary income rates, and some

9:18

of these strategies don't work with short -term

9:21

capital gains. But if you have investment

9:23

gains, let's assume you purchased Apple stock

9:25

for $1 ,000, and it's now worth

9:27

$10 ,000, and you want to gift $10

9:29

,000 to a charity. What you could

9:31

do is you could gift $10 ,000 cash to

9:33

that charity, and that's great. That's wonderful. But

9:35

what might have been better is what if you

9:37

instead looked to give that Apple stock? Let's

9:40

assume for a second you're in the 20

9:42

% tax bracket federally and you're in a

9:44

state like California and I'm going to round

9:46

your tax bracket to 10 % for easy math.

9:48

You're in a 30 % combined tax bracket

9:50

and that's before factoring things like net investment

9:52

income tax. So 30 % might actually be conservative

9:54

in this case. If you're in

9:56

a 30 % tax bracket and you

9:58

sell an investment with $9 ,000 in gains,

10:01

$2 ,700 of those gains are going

10:03

to be paid in taxes. So

10:05

that $10 ,000 investment doesn't really

10:07

represent $10 ,000 to you. It represents

10:09

or it's the equivalent of $7

10:12

,300 to you in terms of

10:14

its after -tax value. So what

10:16

if in this case, instead of gifting $10

10:18

,000 in cash, what if you

10:20

gifted that $10 ,000 in Apple stock

10:22

or any investment stock? Well, what

10:24

that does is you don't pay any taxes on the gains. You

10:27

get the full tax deduction of the

10:29

$10 ,000 gift, and the charity doesn't pay

10:31

any taxes on the gains either. So they

10:33

get the full $10 ,000, and something that

10:35

to you was worth $7 ,300 after taxes,

10:37

now it becomes worth the full $10 ,000.

10:39

To take this a step further, if

10:41

you say, well, I really like that Apple

10:43

stock, and this is not a recommendation

10:45

for owning Apple stock, I'm just using this

10:47

as an example. If you say, well,

10:49

I don't want to get rid of that $10 ,000 of Apple stock,

10:51

I really love that investment. Great. Take

10:53

the $10 ,000 of cash you otherwise

10:55

would have gifted to charity and

10:57

repurchase Apple stock. You now

11:00

own the same exact number of shares,

11:02

except now you've stepped up your cost

11:04

basis. Now the basis on those

11:06

shares is $10 ,000. meaning any future sale

11:08

you do of that stock, your only paying

11:10

taxes on the gains above $10 ,000, no longer

11:12

paying gains on the gains above $1 ,000,

11:14

which was the original cost basis. So if

11:16

you do any type of charitable giving, it

11:18

very often makes sense to gift appreciated shares

11:20

of stock as opposed to gifting cash. Another

11:22

thing you can do is you can gift

11:24

it to family. So let's assume that you're

11:26

in a position where you want to help

11:28

children with a home down payment, or you

11:30

want to give them funds for something, or

11:32

you want to do something. Well, you

11:34

could gift cash, like we talked about in the previous

11:36

example, but what if there's a

11:38

huge discrepancy between your tax bracket and

11:40

your child's tax bracket? Well, if

11:42

instead of gifting, let's say, $20 ,000 to

11:45

your child in cash, what if you

11:47

gifted highly appreciated securities, knowing that

11:49

they're a much lower tax bracket, potentially

11:51

even the 0 % tax bracket? Well,

11:53

if you gift shares of an

11:55

investment, whatever your cost basis is, assuming

11:57

there's a gain on those shares, your

11:59

gifting or their getting, the recipient, is

12:02

getting the same cost basis. So

12:04

let's use that Apple example again, and let's

12:06

just double the values. You want to give

12:08

$20 ,000, you purchase $2 ,000 of Apple stock,

12:10

it's now worth $20 ,000. Well, if you gift

12:12

that to your child, they still

12:14

have that cost basis of $2 ,000, and they

12:16

now have the full value, or they still

12:18

have the same fair market value of $20

12:20

,000. Well, your tax bracket,

12:22

and again, I'm assuming a pretty significant

12:24

variance between what your tax rate is

12:27

and what your child's tax rate is,

12:29

but if you were to sell that,

12:31

you might be paying 20, 25, 30 %

12:33

total taxes on those gains. Versus your

12:35

child, they might potentially be in the

12:37

0%. tax bracket. They might potentially be

12:39

even in the 15 % tax bracket,

12:42

so that at least is a way

12:44

of selling at a lower tax bracket

12:46

than yours if you already have the

12:48

intention of gifting funds to family. So

12:50

that's another potentially creative use of your

12:52

long -term capital gain investments if you have

12:54

the intention of gifting to family. So

12:57

the next thing that you need to keep in mind is this

12:59

concept of a step -up and basis. If these

13:01

are assets that you intend to pass

13:03

on to children or grandchildren or other relatives

13:05

or friends or anyone, there will be

13:07

a step up on these assets upon your

13:09

passing. So if we use an

13:11

extreme example, if you're 89 years old and

13:13

you know you're probably not going to live past

13:15

90 and you got a lot of money

13:17

in the vested and there's a lot of gains,

13:19

almost never would it make a ton of

13:21

sense for you to sell all of those gains.

13:23

It might probably in many cases makes more

13:25

sense for you to say, as long as I

13:28

don't need these funds, I'm not going to

13:30

sell them because upon my passing, there will be

13:32

a step up in basis, meaning wherever the

13:34

fair market value of these securities is on the

13:36

date of my death, that becomes a new

13:38

cost basis. So now that

13:40

becomes tax -free, those assets become tax

13:42

-free to my heirs. And I'm

13:44

specifically talking here, again, just a

13:46

reminder about non -retirement accounts. This

13:48

could be business interest, this could

13:50

be property, this could be stocks, this

13:52

could be any other types of

13:54

investments that aren't held in IRAs, Roth

13:57

IRAs, 401Ks, et cetera. But keep

13:59

that in mind. Now in other states

14:01

and community property states, if one

14:03

spouse dies and assets are jointly titled,

14:05

meaning you own a trust account

14:07

where both of you are grantors and

14:09

trustees, or you own a joint

14:11

investment account, a joint account with rights of survivorship.

14:13

If one spouse passes away, the surviving spouse

14:15

gets a full step up and basis on the

14:17

entirety of that. Now this will vary depending

14:19

on whether you live in a community property state

14:21

or a common law state. Every state can

14:23

be a little bit different here, but there will

14:26

be some type of a step up and

14:28

basis. So really understand how that works in the

14:30

specific state that you live in. And then

14:32

finally, the last thing to know here is that

14:34

long -term capital gains can be fully offset by

14:36

capital losses. So maybe you have a

14:38

significant gain in one investment. You know, this investment

14:40

is not a good core piece of your portfolio. You

14:42

want to diversify out of it. There's a lot

14:44

of gains. You have other investments

14:46

that have losses in them. Can

14:49

you sell some of those investments that have

14:51

losses? Wait over 31 days to repurchase those

14:53

assets so you don't violate the wash sale

14:55

rules and then what you're doing is you're

14:57

realizing those losses to offset these gains. This

14:59

is actually where the concept of a separately

15:01

managed account can be quite useful if you're

15:04

the highest tax bracket and if you're anticipating

15:06

significant gains from the sale of property. real

15:08

estate, stock investments, et cetera. I'll actually link

15:10

out to another video that I did at

15:12

the end of this that shows if you

15:14

are in those highest tax brackets and have

15:16

significant brokerage assets. I did a value to

15:18

show you the value of a separately managed

15:21

account and how that can tie into all

15:23

of this. But as we go through this,

15:25

that's the basic framework that I would look

15:27

at. To start with, understand the downside of

15:29

selling and realizing losses. but compare

15:31

that to the potential downside of not selling

15:33

if it's the wrong investment and understanding the

15:35

loss that could be associated with that. So

15:38

know how this fits in your plan,

15:40

understand what you want to do with these

15:42

assets long term, and then start to

15:44

see are there strategic things we can do,

15:46

whether it's taking advantage of long term

15:48

capital gain, 0 % tax rates, whether it's

15:50

tax loss harvesting, whether it's gifting, whether it's

15:52

charitable giving, whether it's any of these

15:54

things that you can do, to diminish or

15:56

even potentially eliminate some of the long -term

15:58

capital gain taxes you might owe. Now

16:00

I mentioned just a minute ago that I'm

16:02

going to link to a video. Here's

16:04

a video right here. And in this video,

16:06

I talk about the value of a

16:08

separately managed account where if you're that individual

16:10

that's in the highest tax bracket, and

16:12

if you're an individual that has pretty significant

16:14

brokerage assets, business assets, real estate assets,

16:16

this video is for you and you can

16:18

see how you can potentially save lots

16:20

and lots of money and taxes utilizing some

16:22

of the advanced tax management strategies that

16:24

are associated with the right separately managed account.

16:43

To our knowledge, no other conflicts of interest

16:46

exist regarding these testimonials and endorsements. Hey everyone,

16:48

it's me again for The Disclaimer. Please be

16:50

smart about this. Before doing anything, please be

16:52

sure to consult with your tax planner or

16:54

financial planner. Nothing in this podcast

16:56

should be construed as investment, tax, legal,

16:58

or other financial advice. It

17:00

is for informational purposes only. Thank

17:05

you for listening to another episode of the

17:07

Ready for Retirement podcast. If you want

17:09

to see how Root Financial can help you implement

17:11

the techniques I discussed in this podcast, then

17:13

go to rootfinancialpartners .com and click Start Here,

17:15

where you can schedule a call to one

17:17

of our advisors. We work with clients

17:19

all over the country and we love the opportunity to

17:21

speak with you about your goals and how we might

17:23

be able to help. And please remember,

17:25

nothing we discuss in this podcast

17:27

is intended to serve as advice. You

17:30

should always consult a financial, legal,

17:32

or tax professional who's familiar with your

17:34

unique circumstances before making any financial decisions.