New on FinoLib · Volume V: Personal Finance
My latest article is now live on FinoLib, the free finance library I write: Income Tax Example: A $5,000 Loss, Then the Tax Bill, from Volume V: Personal Finance. It is part 3 of a 3-part guide. Read the summary below for the substance of the topic, then continue to FinoLib for the complete treatment.
A closer look
The wash-sale rule. The loss is disallowed if, within 30 days before or after the sale, you buy substantially identical stock or securities, acquire them in a taxable trade, acquire an option to buy them, or buy them in your IRA or Roth IRA. A purchase by your spouse counts too. A disallowed loss is normally added to the new shares’ basis, so it is postponed, not lost, except when the IRA made the purchase: then it is gone for good. A dividend automatically reinvested in the fund you sold counts as a purchase.
Gain harvesting is the reverse. For 2026, long-term gains are taxed at 0% while taxable income, gains included, stays at or below $49,450 for a single filer (7.6). Someone with $40,000 of taxable income can realize $49,450 − $40,000 = $9,450 of gains tax-free and buy the fund straight back; the wash-sale rule covers only losses, so the basis resets higher. The running household, at $52,363 of taxable income (9.1: How Personal Income Tax Actually Works — Brackets and Marginal Rates), is already past that line, and the extra AGI can cost a credit or subsidy (9.1: How Personal Income Tax Actually Works — Brackets and Marginal Rates).
When it isn’t worth it: inside a 401(k) or IRA, where gains and losses aren’t taxed or deductible; for small losses that trading costs and spreads would eat; and in a low bracket now, when the lower basis may be taxed at a higher rate later.
A worked example
Worked Example — Same Salary, Two States
Part 1.6 built the running household’s paycheck in a state with no wage tax: $2,163.60 net every two weeks. The assumed flat 5% tax above, $3,395 a year, takes $3,395 ÷ 26 = $130.58 from each check, leaving $2,163.60 − $130.58 = $2,033.02. Over ten years: $3,395 × 10 = $33,950. Moving to save it works only if living costs match. If rent in the no-tax state were $150 a month higher, the saving would fall to $3,395 − $150 × 12 = $1,595 a year. Higher sales or property taxes would cut it further. Compare the whole budget (1.3), not the tax rate alone.
Decision rule
Rule: Each October, and after any change in job, marriage, children or side income, project the year’s return with the IRS Tax Withholding Estimator, then: Balance due of $1,000 or more and payments short of both 90% of this year’s tax and 100% of last year’s (110% above $150,000 of AGI): add (shortfall ÷ remaining paychecks) in W-4 Step 4(c) (9.3). Refund larger than one paycheck’s withholding ($234.92 for the running household): cut withholding by about (refund ÷ remaining paychecks) a check and move the same amount to savings automatically.
The costliest mistake
Not filing because you owe no tax. Refundable credits are paid only to people who file. A single parent of two qualifying children with $20,000 of 2026 wages owes no income tax as head of household ($20,000 is below the $24,150 standard deduction) but qualifies for the maximum earned income credit, $7,316, plus a refundable Child Tax Credit of 15% × ($20,000 − $2,500) = $2,625, under the 2 × $1,700 limit. Not filing forfeits $7,316 + $2,625 = $9,941 for the year.
When This Breaks
“Harvest every loss” assumes your rate when you finally sell will be no higher than today’s, and that you will obey the wash-sale rule across every account, reinvested dividend and spouse’s trade. It breaks when income rises into the 20% capital-gains bracket, or when a robo-adviser (7.9) harvests in your taxable account while your IRA buys the same fund. Count the tax saved net of the later bill, not the size of the loss.
India Lens
The Income-tax Act, 2025 replaced the 1961 Act on April 1, 2026. It drops “assessment year” and “previous year” for a single tax year (April–March) and renumbers almost every section — 80C is now Section 123, 80D Section 126, 80E Section 129, the 87A rebate Section 156 and the new regime Section 202 — so check the section number before filing.
Recap
The federal income tax is progressive: each 2026 bracket taxes only the slice of income inside it, so crossing into a higher bracket never raises the tax on the dollars below the line, though benefit cliffs and phase-outs can push the real cost of a raise above the bracket rate.
What the full article covers
The full article includes worked examples, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume V: Personal Finance
Read the full article on FinoLib
The complete article, Income Tax Example: A $5,000 Loss, Then the Tax Bill, with every worked example, diagram, quiz and source, is free to read in Volume V, Personal Finance on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance