Timing Capital Gains Around Low-Income Years: A Practical Calendar

Why timing capital gains matters

Capital gains tax is triggered when you sell an asset for more than your basis. Long‑term gains (assets held more than one year) usually get lower federal rates than ordinary income, and those rates are keyed to your taxable income. If you can realize gains when your overall income is low, you may pay 0% or 15% long‑term capital gains tax instead of a higher rate — and you may avoid the 3.8% Net Investment Income Tax (NIIT). For the IRS primer on capital gains, see Topic No. 409 (IRS) and Schedule D guidance (IRS). (See: https://www.irs.gov/taxtopics/tc409 and https://www.irs.gov/forms-pubs/about-schedule-d-form-1040.)

In my 15 years working with clients, the single most powerful lever for saving tax on investment sales has been timing. I’ve seen early retirees and career‑transition clients realize large taxable events in low‑income years and save thousands in federal tax. The key is planning and coordination — with withholding, Roth conversions, retirement distributions, and charitable strategies.

Four principles to use before you sell

1. Estimate your expected taxable income for the year.
   Project wages, pensions, unemployment, Social Security, IRA or 401(k) withdrawals, interest, dividends, and planned gains. Taxes on capital gains depend on taxable income after deductions and adjustments (not just gross receipts).
2. Favor long‑term gains.
   Hold positions at least 12 months; short‑term gains are taxed as ordinary income and usually cost more in a given year.
3. Watch surtaxes and thresholds.
   The NIIT (3.8%) applies when modified adjusted gross income (MAGI) exceeds statutory thresholds; this can wipe out a large portion of a ‘0%’ opportunity if you cross it after a sale. Always account for NIIT in your model (IRS Net Investment Income Tax overview).
4. Coordinate with other taxable events.
   Roth conversions, required minimum distributions (RMDs) afer age 73–75 depending on your birth year, bonus income, or sale of a business can change which capital gains bracket you fall into.

A practical calendar — checklist by month

• January–March: run the numbers and set guardrails

• Collect year‑to‑date income and estimate remaining income for the year.

• Check carryforward capital losses from prior years. Capital loss carryforwards can offset gains immediately when you file.

• If you’re near retirement or switching jobs, forecast the low‑income window and choose target lots for sale.

• April–June (spring): start tax‑aware sales if you’re already in a low‑income year

• Execute sales of long‑held lots first (to get long‑term rates).

• If you expect additional income later, consider using installment sales or delaying the remaining sales until the following low‑income year.

• July–September: midyear check‑in

• Re‑run income projections after summer bonuses, distributions, or other changes.

• Harvest tax losses if markets have corrected: match losses to gains to neutralize taxable events (tax‑loss harvesting). Remember wash‑sale rules if you plan to repurchase a similar security within 30 days.

• October–December: finalize and guard against surprises

• If you’re still under the target threshold, finalize remaining sales.

• If you’re drifting over the threshold, pause sales or use tax deferral techniques (e.g., installment sale, charitable donation of appreciated stock) to avoid pushing taxable income higher.

Tactical strategies and trade‑offs

• Use the 0% long‑term capital gains window carefully:
  When your taxable income (after deductions) sits below the long‑term capital gains 0% threshold for your filing status, long‑term gains can be tax‑free at the federal level. This is often a multi‑thousand‑dollar opportunity. But the threshold changes with inflation and tax law — always confirm current figures with the IRS.

• Coordinate Roth conversions and gains:
  Roth conversions are taxable income but can make future years’ withdrawals tax‑free. If a year is low enough, you might combine a modest Roth conversion with capital gains to fully use lower brackets. However, converting too much can push you out of the 0% capital gains zone and trigger NIIT — model both together.

• Tax‑loss harvesting to neutralize gains:
  If markets have losses, sell losing positions to offset gains. You can offset gains dollar‑for‑dollar with losses; up to $3,000 of excess capital loss can offset ordinary income annually, with the remainder carrying forward. Be mindful of wash‑sale rules when re‑entering positions.

• Installment sales for real estate or business interests:
  Spreading receipts across years can avoid concentrating gains into a single high‑tax year. This is a common solution for real estate sellers and privately held businesses.

• Donate appreciated assets instead of selling:
  If you plan to give to charity, donate appreciated long‑term stock directly to avoid recognizing the gain and to claim a charitable deduction for the fair market value (subject to limits). This can be preferable to selling and donating proceeds.

• Use trusts and charitable vehicles for large gains:
  Charitable remainder trusts (CRTs) and donor‑advised funds can help spread tax consequences or harvest immediate deductions while generating income.

Common pitfalls to avoid

• Ignoring state taxes: state capital gains and ordinary rates vary widely. A federal 0% outcome may still carry state tax. Check your state revenue department rules.
• Forgetting the NIIT: the 3.8% surtax is easy to overlook and is based on MAGI. A seemingly small gap over the NIIT threshold can wipe out savings. (IRS NIIT page: https://www.irs.gov/businesses/small-businesses-self-employed/net-investment-income-tax)
• Wash‑sale missteps: selling to claim a loss and immediately repurchasing a “substantially identical” security within 30 days disallows the loss.
• Unrealistic timing: market conditions might make delaying a sale costly. Tax planning should balance tax and investment objectives; don’t let tax avoidance alone dictate poor portfolio decisions.

Simple worked example (illustrative)

Assume a single filer expects $25,000 in taxable income in retirement year X (after deductions). That low income may leave room beneath the long‑term capital gains 0% bracket — allowing several tens of thousands of long‑term gains to be realized with no federal LTCG tax. If the same person realized those gains in a working year with $100,000 taxable income, they would pay a higher LTCG rate and possibly the NIIT. Always run the numbers with current brackets and consult an advisor.

How to model this in practice

1. Start with a conservative estimate of taxable income and add planned capital gains.
2. Use tax software or a tax professional to model the marginal tax on additional gains (federal + NIIT + state).
3. Test alternate outcomes: selling fewer lots, using installment sales, Roth conversion levels, and charitable gifts.

Where to learn more and related guides

• For taxation basics on capital gains and reporting, see IRS Topic No. 409 and Schedule D instructions (https://www.irs.gov/taxtopics/tc409).
• For planning tactics around timing and loss harvesting, see our guide on “Timing Capital Gains: Harvesting, Losses, and Step‑Up Basis” (FinHelp) for more technical depth: https://finhelp.io/glossary/timing-capital-gains-harvesting-losses-and-step-up-basis/
• If you’re coordinating sales with personal cash needs, our article “Timing Capital Gains with Personal Liquidity Needs” explains balancing taxes and liquidity: https://finhelp.io/glossary/timing-capital-gains-with-personal-liquidity-needs/
• For quick differences between short‑term and long‑term treatment, read “Long‑Term vs. Short‑Term Capital Gains Tax” (FinHelp): https://finhelp.io/glossary/long-term-vs-short-term-capital-gains-tax/

Final checklist before you sell

• Project taxable income and model the tax on proposed gains (include NIIT and state tax).
• Confirm holding periods for long‑term treatment.
• Apply loss carryforwards or harvest recent losses if available.
• Avoid accidental wash sales.
• Consider charitable donation of appreciated assets or installment sales for large gains.
• Document basis and acquisition dates for every lot sold.

Professional note and disclaimer

In my practice, a disciplined calendar and quarterly check‑ins cut surprises and preserved tax‑efficient outcomes for clients. This article is educational only and does not replace personalized tax or financial advice. Tax law and thresholds change; verify current rules and thresholds (including the NIIT) with the IRS or a qualified advisor before acting. For authoritative IRS resources visit: https://www.irs.gov/taxtopics/tc409 and https://www.irs.gov/businesses/small-businesses-self-employed/net-investment-income-tax.

References

• IRS, Topic No. 409 — Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409
• IRS, Net Investment Income Tax (NIIT): https://www.irs.gov/businesses/small-businesses-self-employed/net-investment-income-tax
• FinHelp guides: “Timing Capital Gains: Harvesting, Losses, and Step‑Up Basis”; “Timing Capital Gains with Personal Liquidity Needs”; “Long‑Term vs. Short‑Term Capital Gains Tax” (links above).