Military capital gains exemptions
Something not talked about much (from what I’ve seen) is the topic of capital gains and military exemptions. I’m talking capital gains harvesting.
While the military provides a lot of great investment opportunity, the breaks and benefits you receive often go unnoticed until you separate or retire. The basics usually discussed is the cheaper healthcare, nontaxable pay- BAH, special pays, etc. not a topic trying to discuss here, as there’s plenty of info on other benefits.
Also well known is the home exclusion for gains on selling a home as long as you have lived in it for 2 years. For military the extension is up to any 2 years in the last 15 vice the standard 5 as long as you have PCS orders.
Here you are: trying to maximize your retirement nest egg. You’re doing everything right! TSP Roth- maxed out (spread out to December if you’re BRS to maximize match). Roth IRA- maxed out. Backdoor Roth if needed, and then you have a taxable brokerage for remaining investment money.
But what about that capital gain tax in that brokerage account? When do you realize those gains?
Well that depends. Does your state tax capital gains? Not all do. A majority do, at up to their standard income tax rate for the state level.
However, some states give exemption for military capital gains. Usually this is tied via the exemption for state ordinary income tax.
So, have you considered realizing those gains prior to separation? If you don’t, and you get a job outside the military, establishing residency and a source of income, you now are going to (likely) pay capital gains tax on those realized gains.
So: consider your ability to realize those gains while active duty. You will still owe federal tax, so there are numbers to crunch there on how much you realize at a time. However, if you make over 98,000 you’ll pay 15% on long term gains. Unless you have over 500k of gains, that will be the flat rate. If you make less than 98k AGI, the. You could convert/realize gains up to the 98k limit with zero tax on the gain.
Entering argument. Lots of other factors but hopefully stirs some thought and planning from those who haven’t considered it before but looking at large tax bill on the “outside”.