Here’s how to pay 0% capital gains tax on six-figure income


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It is natural to focus on portfolio losses, especially with the S&P500 down more than 20% over the year.

But you may still have gains after years of growth, and the profits could qualify for a 0% tax rate, depending on your income.

Thresholds may be higher than expected – even six figures of joint income for a married couple, according to financial experts.

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Many investors think of two rates for long-term capital gains, 15% and 20%, explained Dale Brown, chairman of the board of directors of Salem Investment Counselors in Winston-Salem, North Carolina, which is ranked sixth on CNBC’s 2022 FA 100 list.

But there are actually four rates — 0%, 15%, 20%, and 23.8%, with the 3.8% supplement for high incomes. “I’ve had clients with low six-figure incomes who didn’t pay any taxes,” Brown said.

Here’s how: The rates use “taxable income”, calculated by subtracting the higher of the standard or itemized deductions from your adjusted gross income, which is income minus the so-called “over the line” deductions.

For 2022, you may qualify for the 0% long-term capital gains rate with taxable income of $41,675 or less for single filers and $83,350 or less for married couples filing jointly.

Six-figure earners can benefit from the 0% rate

While a couple earning $100,000 may assume they don’t qualify for the 0% long-term capital gains bracket, Brown said investors need to do the math.

For example, suppose a retired couple has $30,000 in tax-free interest, $25,000 in regular income, and $75,000 in capital gains and long-term dividends. Their gross income is $100,000 since it does not include tax-exempt interest.

After subtracting the standard deduction of $27,000, they are left with $73,000 of taxable income, falling into the 0% long-term capital gains tax bracket for 2022.

Part of your income may be in the 0% bracket

Even if a couple’s taxable income is over $83,350, some of their income may still fall into the 0% long-term capital gains bracket, Brown said.

Let’s say the same retired couple had $30,000 in tax-free interest, $25,000 in regular income, and $100,000 in long-term capital gains and dividends.

In this case, their gross income is $125,000 and their taxable income is $98,000. Since the standard $27,000 deduction exceeds the $25,000 of regular income, the $98,000 is entirely made up of capital gains and long-term dividends.

This means that $83,350 is taxed at 0% and the couple owes 15% long-term capital gains tax on the remaining $14,650.

“That’s the 0% slice advantage,” Brown said.

Consider “tax gain harvesting” in the 0% bracket

When the stock market is down, many investors focus on reap tax losses or use the losses to offset other profits.

But you can also explore the possibility of reaping gains if your assets are still up from previous years, said Cory Robinson, vice president and portfolio manager at Tom Johnson Investment Management in Oklahoma City, which ranked No. 30 on the FA 100 list.

“The advantage is that there is no tax, whether it’s dividends or capital gains” as long as you’re below the taxable income threshold, he said.

That’s the beauty of taking gains. You can immediately reinvest.

cory robinson

Vice President and Portfolio Manager at Tom Johnson Investment Management

For investors in the 0% bracket, there may be a chance of reducing taxes on future profits.

Since the taxes are based on the difference between the sale value and the original purchase price, you can sell the asset profitably and buy it back to increase the purchase price.

“That’s the beauty of taking gains: you can immediately reinvest,” Robinson said, explaining that investors don’t need to worry about the so-called wash sale rule.

Although the wash sale rule locks in losses reaped if you buy a “substantially identical” asset within the 30-day window before or after the sale, the same rule does not apply to gains, he said. .

Reaping Gains During Low-Income Years

Whether you’re selling assets for income or leveraging a long-term tax strategy, there may be opportunities to reap gains during low-income years, Brown said.

For example, there may be an income gap if you retire but don’t immediately receive Social Security, a pension, or withdrawals from pretax retirement accounts, he said.

You may also have lower taxable income in a year with a temporary job loss, Brown said.

“The most important thing is timing,” added Robinson, explaining how critical it is to estimate your taxable income before attempting to reap any gains.


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