You should almost always defer taxes as long as possible, max out your 401(k), and let your investments compound tax-free. Don’t realize gains until you absolutely have to.
But there are specific situations where following this conventional wisdom leaves thousands of dollars on the table. Sometimes the smartest move is to sell your winners, pay capital gains taxes NOW, and lock in rates that you’ll never see again.
Here are the 4 situations where you should consider paying taxes now to pay less overall.
Situation #1: You’re in the 0% Federal Capital Gains Bracket
This is the most underutilized tax strategy in personal finance.
Here’s how it works: Your long-term capital gains get added to your other income (wages, interest, dividends) to determine your tax bracket. If that total taxable income stays below certain thresholds, you pay zero federal tax on those gains.
The 2024 thresholds:
Single filers: $47,025 (adjusted for 2025 to ~$49,450)
Married filing jointly: $94,050 (adjusted for 2025 to ~$98,900)
Let’s say you’re single and make $30,000 in wages this year. You have $19,450 of room to realize capital gains completely tax-free at the federal level.
That’s not a deduction. That’s not a credit. That’s $0.00 in federal taxes on legitimate investment gains.
Who should use this strategy:
Students with part-time income
Early retirees living off savings before Social Security
Anyone taking a sabbatical or career break
People with temporary income reductions
The key is to calculate your “room” in the 0% bracket and max it out every year. Sell enough winners to fill that space, then immediately buy them back (there’s no wash sale rule for gains, only losses).
You’ve now permanently eliminated federal tax on those gains while maintaining your investment position.
Situation #2: You’re a Low Earner Now, High Earner Later
Medical residents are the perfect example.
You’re making $60,000 as a resident. Your total income puts you in the 15% federal capital gains bracket. In three years, you’ll be an attending making $400,000+. That’s the 20% bracket (plus the 3.8% Net Investment Income Tax).
The math:
Sell $50,000 in gains now: Pay $7,500 (15%)
Sell $50,000 in gains later: Pay $11,900 (20% + 3.8% NIIT)
Savings: $4,400
And that’s just federal. Add in state taxes and the difference compounds.
Other examples:
Law students before big law jobs
Startup employees before an exit
Anyone in a low-earning year before a career jump
Military members during service (often lower taxable income)
The strategy works because capital gains brackets are based on your total income in the year you realize the gains. Lock in the lower rate while you can.
Important note: You need to hold the investment for at least one year to qualify for long-term capital gains rates. Short-term gains (under one year) are taxed as ordinary income at much higher rates.
Situation #3: Tax Law Changes Are Coming
Capital gains tax rates aren’t set in stone.
The current federal rates (0%, 15%, 20%) have been relatively stable, but political winds change. Multiple proposals have suggested:
Raising the top rate to 25% or higher
Taxing unrealized gains for high earners
Eliminating the step-up in basis at death
Treating capital gains as ordinary income above certain thresholds
I’m not making political predictions. I’m saying: if you believe rates are going up, there’s a strong case for realizing gains at today’s rates.
Example scenario: You have $200,000 in unrealized gains. You’re in the 15% bracket now. If rates increase to 20% across the board (hypothetically), that’s a $10,000 difference on the same gains.
The strategic approach:
Monitor tax policy discussions
If rate increases seem likely, calculate your potential exposure
Consider realizing gains in the year before changes take effect
Reinvest immediately to maintain your investment position
This is essentially “tax rate arbitrage”, locking in today’s known rates rather than gambling on tomorrow’s unknown rates.
Situation #4: Moving from a No-Tax State to a High-Tax State
This is pure geographic arbitrage, and it’s completely legal.
State capital gains tax rates vary dramatically:
Texas, Florida, Nevada, Washington: 0%
California: 13.3%
New York: 10.9%
New Jersey: 10.75%
Let’s say you’re moving from Texas to California with $500,000 in unrealized gains.
Sell before you move:
Federal tax (15% bracket): $75,000
Texas state tax: $0
Total: $75,000
Sell after you move:
Federal tax (15% bracket): $75,000
California state tax (13.3%): $66,500
Total: $141,500
Savings from selling before the move: $66,500
You can literally save tens of thousands of dollars by timing your sale to occur while you’re still a resident of the low-tax state.
Critical details:
State residency rules vary—usually based on where you spend most of your time
Some states have “exit taxes” or look-back rules for former residents
Document your residency change carefully (driver’s license, voter registration, etc.)
Consult a CPA familiar with both states’ tax laws
Who should consider this:
Anyone relocating for work from low-tax to high-tax states
Retirees planning to move to be near family
Remote workers choosing where to establish residency
Quick Review: How Capital Gains Taxes Actually Work
Federal long-term capital gains rates (2024-2025):
Filing Status0% Bracket15% Bracket20% BracketSingleUp to $49,450$49,451 - $545,600$545,601+Married Filing JointlyUp to $98,900$98,901 - $612,350$612,351+
Additional considerations:
Net Investment Income Tax (NIIT): 3.8% surtax on investment income for high earners (over $200k single / $250k married)
State taxes: Added on top of federal (0% to 13.3% depending on state)
Short-term vs. long-term: Must hold for >1 year to qualify for preferential rates
Example calculation: You’re single, make $100k in wages, realize $50k in long-term capital gains:
Total income: $150,000
Federal capital gains tax: $7,500 (15% of $50k)
California state tax: $6,650 (13.3% of $50k)
Total tax on gains: $14,150 (28.3% effective rate)
Bottom Line: Tax Timing Is As Important As What You Invest In
Tax deferral is powerful, but it’s not always optimal.
The goal isn’t to pay the least tax this year, it’s to pay the least tax over your lifetime.
Action steps:
Calculate your current capital gains bracket (including state)
Project your future income (career changes, retirement, etc.)
Identify any 0% bracket room you’re not using
Monitor upcoming tax law changes
Plan around major life changes (moves, job changes, retirement)
Don’t leave money on the table because you’re following generic advice. Run the numbers for YOUR specific situation.
Advizmo handles tax-optimized selling, tax-loss harvesting, and wash sale avoidance for you, so you can focus on living your life instead of tracking tax lots. We’re an SEC-registered investment advisor that combines automated personal finance management with institutional-grade tax optimization.
