Income Tax Example: A $5,000 Loss, Then the Tax Bill

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.

Everything above this section is federal. State income tax adds a separate layer that varies enormously. For 2026, eight states levy no individual income tax at all: Alaska, Florida, Nevada, New Hampshire (which repealed its tax on interest and dividends as of 2025), South Dakota, Tennessee, Texas and Wyoming. A ninth, Washington, taxes capital gains but not wages. Fifteen states, Illinois and Pennsylvania among them, use a single flat rate. The other 26, plus the District of Columbia, use graduated brackets like the federal system; California’s top rate is 13.3%.

The state line is not the whole bill. In 16 states (by the Tax Foundation’s count), cities, counties or school districts add their own income tax: New York City, Pennsylvania’s local earned-income taxes, and Ohio’s municipal taxes are the best-known examples. A state that skips the income tax must raise revenue some other way, usually through sales, property or business taxes, so compare total tax, not one line.

Where state tax meets the federal return. State and local income (or sales) taxes and property taxes are deductible on the federal return only if you itemize, and only up to the SALT cap — $40,400 for 2026, shrinking by 30% of MAGI above $505,000 until it reaches the $10,000 floor at $505,000 + $30,400 ÷ 0.30 ≈ $606,333 (9.2). For most households the cap never binds, because itemizing doesn’t win. If the running household lived in a state with a flat 5% income tax on the same wages as its federal return, it would pay about 5% × $67,900 = $3,395; as a renter it pays no property tax directly. That is far below the $16,100 standard deduction, so the state tax buys no federal deduction at all. The higher cap matters mainly to homeowners in high-tax states with large property-tax bills — such as the year-eight household weighing itemizing for the first time (Part 14.3).

Moving, remote work and residency. A state generally taxes its residents on all their income, wherever it is earned, and nonresidents only on income earned there. Residency usually turns on domicile: the one permanent home you intend to return to, which a long temporary stay elsewhere doesn’t change. The “183-day rule” is not a universal safe harbor. In New York, for example, you are a resident if your domicile is there, however few days you spend in the state. You are also a resident if you keep a permanent home there for substantially all of the year and spend 184 days or more in the state. A remote worker can also owe tax to the state where the office is. New York generally counts a nonresident’s work-from-home days as New York days when the employer’s primary office is in New York, unless the employer has a bona fide office at the home location. If you move, change your license, voter registration and addresses at once, keep a log of your days, and expect part-year returns in both states.

Conformity. States don’t always adopt federal tax rules. California, for example, does not allow the HSA deduction and taxes employer HSA contributions, so the triple tax advantage in Part 6.6 applies to federal tax only. New federal deductions such as the tips and overtime deductions (9.2) may not reduce your state tax at all.

Parts 6 and 7 built the accounts and the investing discipline. This Part answers the question all of that was ultimately in service of: how much is actually needed, how to turn a portfolio into a paycheck that has to last decades, and how Social Security — a live policy question in 2026 — fits into the picture.