Taxpayers who sold some investments last year may be able to take advantage of an often overlooked tool to reduce their tax liability and qualify for a 0% tax rate.
Long-term capital gains have three tax rates based on income: 0%, 15%, and 20%, and the wealthiest Americans are subject to a 3.8% Medicare surcharge.
For the 2024 tax filing season, the 0% tax rate on long-term capital gains (any assets held for more than one year) will be $44,625 or less for single filers and $89,250 for married couples filing jointly. Applies to taxable income of less than $. .
The income limit is also higher than it appears. This is because the 0% tax rate is based on an individual’s taxable income. Taxable income is calculated by subtracting the greater of the standard deduction or total itemized deductions from your adjusted gross income.
The standard deduction for 2023 was $13,850 for single filers and $27,700 for joint filers.
Nominally, this means that this fee applies to a minimum of $58,475 for individuals and $116,950 for couples.
However, even if you are a taxpayer subject to the tax rate, there are limitations.
“There’s a lot of confusion about how 0% interest rates work,” Eric Bronnekant, a certified financial planner and head of tax at Betterment.com, told FOX Business last year. “The first thing I’m going to explain is that there’s no such thing as a 0% rate with no limits.”
One important caveat, he said, is the concept of “stacking,” where ordinary income is used as the main condition for a 0% interest rate.
For example, if an individual earns long-term capital gains and $20,000 in qualified dividends, resulting in a $100,000 profit, he or she may mistakenly believe that he or she is entitled to a 0% interest rate.
But because of the “stacking” principle, with ordinary income at the bottom and capital gains at the top, a $100,000 salary would push that individual’s tax rate to 15%.
“I think that’s a common misconception,” Bronnekant says.
Additionally, there are limits to the amount of investment income that can be tax-free.
Even if a taxpayer has no taxable income, the 0% tax rate on long-term capital gains only applies up to the income level threshold.
“A question I often get is, ‘If I only have $1 million in long-term profits and qualified dividends and that’s my only income, can I get a 0% interest rate?'” he stated. “I’m like, ‘Yes, but not for a million dollars.’ You can get it for a fraction of that amount.”
There are also strategies that high-income earners can use to take advantage of the 0% long-term capital gains tax rate, said Michael Luger, partner and chief investment officer at Greenbush Financial Group in Albany, New York.
Taxpayers can play the same as Luger. This is called the “income timing game” to optimize for lower tax rates. If an individual plans to retire soon, they may consider waiting to sell their investment property until after they retire, since it will fall in a lower tax bracket than they did during their working years. .
“If you look at someone who is wealthy, they can basically choose their tax rate,” he told FOX Business. “They are not showing income. They are withdrawing funds from after-tax assets.”
