After recently establishing a plan to obtain ACA health insurance, we were left with a very tight financial scenario. In the days since, I have learned we could ease that financial situation with tax optimization via capital gains harvesting.
The tight budget is self inflicted due to the philosophical stance we are taking that we want to avoid medicaid and CHP+ (public assistance health care programs), even if we would qualify for them in strict terms of income. Instead, we want to have regular insurance while staying in range of premium discounts. That requires us to convert about $67K of IRA money to Roth IRA, in turn increasing our income to $88K for the year. That income level is just across the threshold that puts us out of range of both medicaid and CHP+.
The financial strain comes in the form of the roughly $8,100 in state and federal taxes that would be created by the Roth conversion. We could just barely absorb those taxes and stay under 4%, and only if we count the $4,400 child tax credit. The danger with this plan is it assumes we won’t find any increased cost of living upon returning to CO. That is very unlikely, and I’m sure nearly everything from food to insurance will cost a little more than it did in the summer of ’25 when we left.
Discovering A Relief Valve
I accidentally stumbled upon the solution which provides some room in our budget while researching something else. When we return to CO we will have several large purchases to make. These include replacing the carpet in our house, buying a car, and paying movers. In addition to these costs, we also want to have a year’s worth of expenses moved out of stock and into a money market fund (SWVXX) in our taxable brokerage account (Schwab). This allows us to avoid being forced to sell stock in the event of a market downturn.
Capital Gains
With the stock market at an all time high, this seemed like a good time to sell enough stock to load up the coming year’s worth of expenses and the cash necessary to make the mentioned purchases. My initial concern was surrounding how much tighter the taxes on long term capital gains would make an already tight budget.
As I refreshed my memory on how those taxes work though, I realized we are at the 0% federal long term capital gains tax rate. As long as our income is under $98,900 (for married filing jointly), we pay nothing in federal taxes and only 4.4% in CO taxes for capital gains on stock sold.
Executing Stock Sale
To meet our cash needs, we only need to sell about $10K in stock, and selling $10K in stock doesn’t mean you have a capital gain of $10K. The capital gain is calculated from the current price of the stock, minus what you paid for the stock. If you are buying stock over time, you will have various purchase prices for your stock. When you sell you have the choice of selling the lowest cost shares (highest capital gains), the highest cost shares (lowest capital gains), or other options in between like FIFO or LIFO.
For our purposes we want as much in capital gains as possible, and definitely more than selling $10K of stock would provide. The benefit is that for every dollar in capital gains, we need to reduce our Roth conversion by one dollar to stay at $88K of income. That dollar for dollar tradeoff is very beneficial for our situation. Instead of pay 12% in taxes on a converted Roth dollar, we are paying 0% in taxes on a capital gain dollar.
We ultimately sold $35K worth of the lowest cost shares, creating a capital gain of $17,400. That saves us $2,088 in federal taxes, giving us $174 of additional breathing room back in our monthly budget. Despite only needing $10K worth of cash, we plan to keep all $35K in SWVXX to have a more conservative 1.5 years of expenses easily accessible.
The End Result
Tax Impact of Harvesting Capital Gains at 0%
How $17,400 in long-term capital gains displaces 12%-bracket Roth conversion — same $88K MAGI, lower taxes
| Tax Layer | Source | Amount | Rate | Tax |
|---|---|---|---|---|
| Before — No Stock Sale, $67K Roth Conversion | ||||
| Standard deduction | Mix of all income | $32,200 | 0% | $0 |
| 10% bracket | Rental, interest, dividends, conversion | $24,800 | 10% | $2,480 |
| 12% bracket | Roth conversion (remainder) | $26,375 | 12% | $3,165 |
| Top of stack | Qualified dividends | $4,625 | 0% | $0 |
| Total federal | $88,000 | $5,645 | ||
| Colorado state tax | ($88,000 − $32,200) × 4.4% | $55,800 | 4.4% | $2,455 |
| Total tax (before) | $8,100 | |||
| Roth conversion amount | $67,315 | |||
| Tax Layer | Source | Amount | Rate | Tax |
|---|---|---|---|---|
| After — $35K Stock Sale with $17,400 in Gains, $50K Roth Conversion | ||||
| Standard deduction | Mix of all income | $32,200 | 0% | $0 |
| 10% bracket | Rental, interest, dividends, conversion | $24,800 | 10% | $2,480 |
| 12% bracket Reduced — gains displaced $17,400 of conversion | Roth conversion (smaller) | $8,975 | 12% | $1,077 |
| Top of stack Taxed at preferential federal rate | Long-term capital gains | $17,400 | 0% | $0 |
| Top of stack | Qualified dividends | $4,625 | 0% | $0 |
| Total federal | $88,000 | $3,557 | ||
| Colorado state tax No preferential rate — all income taxed equally | ($88,000 − $32,200) × 4.4% | $55,800 | 4.4% | $2,455 |
| Total tax (after) | $6,012 | |||
| Roth conversion amount | $49,915 | |||
| Tax Savings Summary | ||||
| Federal tax savings | $5,645 → $3,557 | |||
| Colorado tax | $2,455 → $2,455 (unchanged) | |||
| Total annual tax savings | $2,088 ($174/mo) | |||
End Of Year Tasks
At the end of the year, we need to be sure we hit the $88K income level. There are some things we will have to do to ensure that’s possible.
- Determine all interest and dividend amounts for the year
- Finalize net income from renting out our house
- Gather realized gain figures for all stock sold
- After adding up all of the above, convert enough IRA to Roth IRA to hit $88K in income
That’s just a little bit of busy work that I’m happy to do in order to optimize both our taxes and our health insurance.
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