Time to Take Tax-Free Stock Profits
If you qualify, use the capital gains break this year.
OUR READER
Who: Lynne Spichiger, 65
Where: Belchertown, Mass.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Question: Can I sell some winners to take advantage of the temporary 0% tax on capital gains for investors like me, then buy them right back?
Lynne believes she has a clever tax trick up her sleeve. She wants to sell some winning stocks sometime during 2012 to cash in on the expiring 0% tax rate for some taxpayers on long-term capital gains. But she wants to go on investing in her favorites, so she intends to buy back those shares. "This way, when I sell those stocks in the future, I'll have restarted at a higher cost basis and won’t be hit as hard with taxes," says Lynne.
Zero taxes and stock market profits are rarely in the same conversation, but Lynne, a self-employed grant writer and instructional designer who files taxes as single, is eligible for this benefit for two reasons. First, she expects her 2012 income to be small enough to qualify for the 0% capital gains provision, which phases out for single filers at a taxable income of $35,350 (the limit is $70,700 for joint returns). Second, she's held her winners, which include McDonald’s (symbol MCD) and Caterpillar (CAT), for more than one year. But before she acts, Lynne wants to be sure the strategy will work.
Good news for Lynne. She's on the right track. "That's a brilliant tax maneuver," says Sheryl Garrett, founder of the Garrett Planning Network. As long as Lynne avoids a few traps, she's off to the races.
The first pitfall would be allowing the gains to push her over the income limit. As it happens, Lynne says she wouldn’t mind overshooting the 0% income limit—and owing 15% tax on the slice of the profits that exceeds it—because she wants the money before she begins collecting Social Security in 2013. From that point on, if her taxable income tops $25,000, the government will tax up to half of her Social Security payments; if she earns more than $34,000, then up to 85% is taxable. Anyone on the verge of claiming Social Security should investigate whether it pays to grab capital gains early.
Trap number two would result from sloppy math or poor record keeping. Capital gains are calculated by subtracting what you paid for an asset (plus fees and commissions) from the sale price. But what happens if you’ve reinvested dividends, which is common with blue-chip stocks and almost automatic with mutual funds? That ratchets up your cost basis and reduces the capital gains or conceivably triggers a loss. Review your statements or check with your brokerage firm to make sure you report the proper gains.
Lynne's third hurdle is the risk that the stocks she plans to buy back will skyrocket before she can get back in, thus reducing her returns. Lynne says that she'd like to wait for a pullback before repurchasing her stocks. But with McDonald’s and Caterpillar more than holding their value, she may have a long wait. Fortunately, blue-chip stocks like hers are liquid; Lynne can buy back her shares whenever she wants.
It is generally unwise to let tax strategy dictate investment moves. But Lynne is an exception because she has access to an unusual tax break. "Lynne is working the tax system legally and effectively," Garrett says. You can't ask for more.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Susannah Snider worked as a research-reporter and staff writer at Kiplinger Personal Finance Magazine. She went on to serve as managing editor for money at U.S. News, overseeing articles and content covering real estate, personal finance and careers. She is a certified financial planner professional and earned her CFP marks in 2019.
-
Ten Cheapest Places to Live in Texas
Property Tax Looking for a cheap place to live in Texas? Look no further. These counties have the lowest property tax bills in the Lone Star State.
-
AI Is Missing the Wisdom of Older Adults: What It Means for You
AI will increasingly affect your healthcare and finances, but young workers are primarily designing the systems and getting most of the jobs.
-
Homeschoolers: 529 Plan Savings Could Soon Work for You
Savings Accounts A new House GOP bill could change how you save for your child's homeschool education. Find out how.
-
Ohio Announces Two-Week Sales Tax Holiday Amid Tariffs, High Prices
State Tax Ohioans won't want to miss out on savings as pressure from tariffs spikes prices.
-
Five ‘Big Beautiful Bill’ Tax Changes to Watch in the Senate
Tax Policy The House passed its version of Trump’s "One Big, Beautiful Bill." Here’s what to look for as Senate Republicans take up the mega legislation.
-
New GOP Car Loan Tax Deduction: Which Vehicles and Buyers Qualify
Tax Breaks To fulfill Trump's campaign promise, House GOP lawmakers want to offer a tax deduction for car loan interest. How would it work?
-
Big GOP Tax Bill Could Change Your Estate Planning for 2025
Tax Law The GOP might extend and increase the higher estate and gift tax exemption and AMT thresholds. What might this mean for your estate plan?
-
New 'No Tax on Tips' Bill Approved: What to Know Now
Income Taxes Will you stop paying taxes on your tip income this year?
-
Millions Could Lose SNAP Food Benefits Under Trump Tax Cut Plan
Tax Policy The House Agriculture Committee approved nearly $300 billion in cuts to SNAP benefits, putting many at risk of hunger.
-
Missouri Leads Capital Gains Tax Repeal: Will Your State Follow?
State Tax As one state becomes a test case, policymakers and taxpayers across the U.S. will be watching closely to see what happens next.