I have gone on record stating that I don't believe in tax gain harvesting (TGH) within taxable portfolios. I have plenty of reasons:
* Clients hate to pay taxes.
* There is no guarantee that capital gains rates will really increase in 2013.
* Unless the client is planning to completely liquidate a portfolio, a "buy & hold" strategy as well as deferral techniques, such as tax loss harvesting and high cost lot identification, can effectively defer gain recognition for years.
* Appreciated securities held at death receive a stepped-up basis.
Having said all that, there are limited circumstances that I believe justify TGH.
The obvious reason for TGH is during a year in which the client is subject to the zero percent capital gain rate. Additionally, TGH could be beneficial in specific individual client situations.
TGH when the client falls within the zero capital gain bracket is a "freebie" and recognizing gain to this extent is a must. In fact, advisors who neglect to take advantage of this opportunity are quite simply not doing their jobs.
The zero percent capital gain rate applies to long-term capital gains for single taxpayers with taxable income of less than $35,350 and to married couples with taxable income of less than $70,700. Thus, to identify these opportunities, advisors will need an estimate of each client's expected calendar year taxable income. Whether calculated by the advisor, the client or the client's CPA, this should be done close to the end of the year to avoid surprises while leaving enough time to process transactions.
For example, assume that Roger and Lynn are expecting 2012 taxable income of $30,000. Since the zero percent capital gain rate applies when taxable income of less than $70,700, Roger and Lynn could recognize long-term capital gains of up to $40,700 without paying additional tax. (Prior to harvesting gains, advisors should check with clients' CPAs to ensure against unexpected results, such as AMT or increased taxability of Social Security benefits.)
There are also various "one-off" situations when TGH should be considered. One such situation is when a client is in an unusually low tax bracket this year and anticipates needing to liquidate holdings not long after year-end.
For example, assume that Karen has accumulated an appreciated investment portfolio over many years. In 2012, her earnings are minimal since she will be completing her doctoral degree to pursue a second career. Karen has already accepted a new job to begin January 2012 at an expected salary of $150,000. By mid-2013, Karen plans to move out of her rented condo and will purchase a home with a substantial down payment. In this case, harvesting gains in 2012 could result in minimal tax, thus, allowing Karen to liquidate holdings when needed without incurring a large tax liability.
Bottom line is that TGH should be considered any time a client is expected to be in a very low tax bracket. Otherwise, I remain a proponent of proactively pursuing tax loss opportunities. Tax loss carry forwards never expire and will be available to offset future capital gains - even if and when capital gain rates increase!