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Tax Planning Can Help You Benefit from the 0% Capital Gains Rate

March 06, 2017

Heard of the 0% capital gains tax rate? Taxpayers can benefit greatly from this provision, but proper tax planning is important.

A little known provision in the tax code allows taxpayers to pay a 0% rate on qualified dividend income and long-term capital gains. This was one of the Bush era tax cuts that can be very favorable to taxpayers who have income from qualified dividends and long-term capital gains.

Let’s dive a little deeper.

The rate applies when a taxpayer’s taxable income is in the 15% or 10% taxable income brackets. For single taxpayers, that means the rate applies up to $37,650 of taxable income and for married taxpayers up to $75,300 of taxable income.

An example of how this could benefit a taxpayer:

In 2016, a married couple has $50,000 of ordinary income, $25,000 of qualified dividend income, $25,000 of long-term capital gains and $20,000 of itemized deductions. Their taxable income is after the personal exemption is $71,900. Their federal income tax is $2,361.

That is an effective tax rate of 3.2% on taxable income of $71,900. If long-term capital gains increased by $10,000 to $35,000, the federal tax would be $3,351, an increase of only $990 and still a very low effective rate. It is always important to remember any increase in federal income will affect your state income tax and possibly cause more social security income to be taxed.

Tax planning is important.

It may be difficult for taxpayers to get their taxable income below the $75,300 or $37,650 numbers but proper tax planning can pay off. Some suggestions on how you can reduce taxable income:

  • Accelerate state income tax deductions and charitable contributions
  • Maximize 401(K) and IRA deductions
  • Sell investments that are up, and buy them back right away, therefore avoiding the wash-sale rule. You can get a step-up in basis on current investments without owing federal taxes.
  • Be on the lookout for “obscure” deductions like the moving expense deduction.
  • Consider tax-exempt bonds.

Will Trump eliminate this provision?

It is too early to tell whether the new administration will change this tax provision but based on discussions about lower rates, we are inclined to think he will not.

If you have any questions concerning the capital gains tax, please contact a member of our tax services team.

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