A retired couple owns an investment that has doubled in value. They paid $50,000 for it, and today it is worth $100,000.
That growth is welcome. But the position now represents more of their portfolio than they would like. They want to sell and spread the money across a more diversified mix of investments.
One thing keeps stopping them: the tax bill.
With $50,000 in embedded gains, they assume selling will be expensive. So they keep holding an investment they would otherwise prefer to reduce.
Then a year-end tax review reveals something they had not considered: they could realize the entire $50,000 gain at a 0% federal capital gains tax rate.
The couple files jointly and expects $40,000 in taxable ordinary income for 2026, after deductions. They have held the investment for more than a year, so the profit would qualify as a long-term capital gain.
For simplicity, assume they have no other capital gains or qualified dividends, neither spouse is collecting Social Security, and the sale does not change their deductions or other income-related benefits.
Long-term capital gains have their own federal tax brackets, including a 0% bracket. For married couples filing jointly in 2026, the upper limit of that bracket is $98,900 in total taxable income.
The word “total” matters. The couple does not get a separate $98,900 allowance for investment profits. Their gains sit on top of their other taxable income.
Here, selling the investment would add $50,000 in gains to their existing $40,000 of taxable ordinary income. That brings total taxable income to $90,000, leaving the entire gain within the 0% bracket.
They could sell the $100,000 position, recognize the $50,000 profit, and owe no federal capital gains tax on that sale. Their ordinary income would still have its own tax bill.
The review changes their decision. Instead of postponing the sale because they assume taxes will be prohibitive, they sell before year-end and use the proceeds to diversify.
This is sometimes called tax-gain harvesting: deliberately realizing investment gains when the tax treatment is favorable.
The opportunity comes from matching the transaction to the year.
Suppose this couple expects pension payments or larger IRA withdrawals next year. Those income sources could use up some or all of the room currently available in the 0% bracket. A sale that qualifies for 0% this year might face a higher rate later.
If the same $50,000 gain were fully taxed at 15%, the federal capital gains tax would be $7,500. That is a useful comparison, though it is not a guaranteed future savings figure. Future income, tax rules, and what ultimately happens to the investment all matter.
Still, avoiding a sale without checking the numbers can mean passing up an opportunity.
This is why tax planning does not stop at retirement.
During our working years, tax planning often revolves around contributions and deductions. In retirement, deciding when to recognize income—and which accounts it comes from—becomes part of the work.
A lower-income year can create flexibility. Recognizing a gain intentionally may help fund spending, reduce an oversized investment position, or prepare for future withdrawals.
The full calculation matters, however. A gain taxed at 0% still increases adjusted gross income and can affect health insurance assistance or other income-based benefits. State taxes may apply. Qualified dividends and year-end fund distributions can also reduce the available room.
A year-end projection helps establish whether the opportunity exists before a trade is placed.
At Hanover, we understand that investment decisions and tax decisions often overlap. We help connect your portfolio, retirement income, and tax picture so you can make informed choices about when to act.
Before letting an assumed tax bill keep you in an investment you would prefer to sell, let’s look at the numbers together.