Taking Advantage of the Zero Tax on Long-Term Capital Gains

Posted by Lee Reams Sr. on

Taxpayers whose top marginal tax bracket is less than 25% enjoy a long-term capital gain tax rate of zero.  As a result, the tax on any long-term capital gains within the 10% or 15% tax bracket is zero for these taxpayers. This provides an interesting strategy for lower income taxpayers or those whose income is abnormally low due to other reasons.

Even if the taxpayer wishes to hold on to the stock because it is performing well, they can sell it and immediately buy it back, allowing them to include the current accumulated gain in this year’s return with no tax while also reducing the amount of taxable gain in the future. If they are concerned about the so-called wash sale rules that require a taxpayer to not buy back the same stock within the 30 days before or after the sale of the stock, that is not a problem because the wash sale rules only apply to stocks sold at a loss.   

To determine if a taxpayer can take advantage of this tax-saving opportunity, you must determine if their taxable income, without the potential long-term capital gains added, is below the 25% tax bracket.  The following table shows the points at which income becomes taxable at 25% for different filing statuses in 2017.  

25% Tax Bracket Threshold – For 2017

Filing Status

Single

Head of Household

Married Filing Jointly

Married Filing Separately

Taxable Income

$37,950

$50,800

$75,900

$37,950

 

Example: Suppose a married couple is filing jointly and has projected taxable income for the year of $50,000.  From the table above we find that the 25% tax bracket threshold for married joint filers is $75,900.  That means they could add $25,900 ($75,900 - $50,000) of long-term capital gains to their income and pay zero tax on the capital gains. 

Of course, this strategy must be worked out based upon the taxpayer’s projected taxable income for the year, which could be more or less than the estimated amount.

In addition, if the taxpayer has any loser stocks, he or she can sell them for a loss, and thereby allow additional long-term capital gains to take advantage of the zero tax rate.

There are also some situations where the increase in adjusted gross income as a result of the added long-term capital gains could have other unanticipated adverse effects on a taxpayer that could reduce the overall benefit of this strategy. They include reducing the taxpayer’s ACA premium tax credit, and for seniors, causing an increase in the Medicare premium withheld from their Social Security benefits.    

 

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