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Here’s how you can pay 0% capital gains taxes with a six-figure income


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It’s natural to fixate on portfolio losses, especially with the S&P 500 down greater than 20% for the yr.

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

The thresholds could also be higher than you expect — even six figures of joint income for a married couple, financial experts say.

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

But there are literally 4 rates — 0%, 15%, 20% and 23.8%, with the 3.8% surcharge for higher earners. “I’ve had clients with low six-figure incomes who paid no taxes,” Brown said. 

Here’s how: The rates use “taxable income,” calculated by subtracting the greater of the usual or itemized deductions out of your adjusted gross income, that are earnings minus so-called “above-the-line” deductions.

For 2022, you might 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 may qualify for the 0% rate  

While a pair making $100,000 may assume they do not qualify for the 0% long-term capital gains bracket, Brown said investors have to crunch the numbers.

For instance, for instance a retired couple has $30,000 in tax-exempt interest, $25,000 of standard income and $75,000 in long-term capital gains and dividends. Their gross income is $100,000 because it doesn’t include the tax-exempt interest. 

After subtracting the usual deduction of $27,000, they’re left with $73,000 in taxable income, falling inside the 0% long-term capital gains tax bracket for 2022. 

A part of your earnings could also be within the 0% bracket 

Even when a pair’s taxable income is above $83,350, a part of their earnings should still fall into the 0% long-term capital gains bracket, Brown said.

As an example the identical retired couple had $30,000 in tax-exempt interest, $25,000 of standard income and $100,000 in long-term capital gains and dividends.

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

This implies $83,350 is taxed on the 0% rate and the couple owes 15% long-term capital gains taxes on the remaining $14,650.

“That is the advantage of the 0% bracket,” Brown said.

Consider ‘tax-gain harvesting’ within the 0% bracket

When the stock market is down, many investors deal with tax-loss harvesting, or using losses to offset other profits.

But you might also explore harvesting gains in case your assets are still up from previous years, said Cory Robinson, vp and portfolio manager at Tom Johnson Investment Management in Oklahoma City, which ranked No. 30 on the FA 100 list.

“The profit is there are zero taxes, whether it’s dividends or capital gains” so long as you are below the taxable income threshold, he said.

That’s the great thing about taking gains. You may immediately reinvest.

Cory Robinson

Vice chairman and portfolio manager at Tom Johnson Investment Management

For investors within the 0% bracket, it’s possible there is a likelihood to scale back taxes on future profits.

Since taxes are based on the difference between the worth upon sale and original purchase price, you may sell the profitable asset and repurchase to extend the acquisition price.

“That is the great thing about taking gains: You may immediately reinvest,” Robinson said, explaining how investors needn’t worry concerning the so-called wash sale rule.

Although the wash sale rule blocks harvested losses in the event you buy a “substantially an identical” asset inside the 30-day window before or after the sale, the identical rule doesn’t apply to gains, he said.

Harvesting gains during lower-earning years

Whether you are selling assets for income or leveraging a long-term tax strategy, there could also be opportunities to reap gains during lower-earning years, Brown said.

For instance, there could also be an income gap in the event you retire but don’t immediately receive Social Security, a pension or withdrawals from pretax retirement accounts, he said.

Chances are you’ll even have lower taxable income during a yr with a short lived job loss, Brown said.

“Crucial thing is the timing,” Robinson added, explaining how it is vital to estimate your taxable income before attempting to reap gains.

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