The zero rate on investment income is often overlooked. Make sure it’s in your tax tool kit.
By Laura Saunders, The Wall Street Journal, March 31, 2023
Zero, zip, zilch: The U.S. tax code has a 0% rate on investment income, even for Americans with significant assets. …
Nominally, the rate disappears for single filers with taxable [adjusted income after deductions] above $44,625 and joint-filing couples with income above $89,250 for 2023. … So the 0% rate can apply to at least $58,475 of capital gains and dividends for single filers and $116,950 for married joint filers — far above the nominal limit [income before adjustments and deductions]. It can be higher still if the taxpayer has more deductions, is self-employed, or is age 65 or older. For married joint filers ages 70 and 72 who take the standard deduction, the 0% rate typically applies to at least $119,950 of eligible income. …
The 0% rate applies to net long-term capital gains and most dividends. It doesn’t reduce rates on wages, taxable interest (as from bank accounts or bond funds), pensions, net short-term capital gains on investments held a year or less, taxable Social Security payments, IRA or 401(k) distributions or Roth IRA conversion income. …Under the law, the income eligible for the 0% rate “stacks” on top of a filer’s other income. The more other income there is, as from a pension or Social Security, the less ability there is to use the 0% rate. … [end quote]
The 0% tax rate favors stock market investors in non-retirement accounts. Because of the “stacking” rule, retirees (or people between jobs) benefit most…as long as the retirees aren’t taking Minimum Required Distributions from IRAs.
Let’s consider that I have RSU’s with Nvidia and that I’m 8-10 years from retirement. I’ll pay income taxes as these grants vest over the next 3.5 years. But if I sell-to-cover the taxes but then hold the remaining shares, does this mean that when I do retire, if my income that year is very low, then I can sell all those shares and have zero tax liability on the long term capital gains that result? That doesn’t seem right.
@bjurasz remember the “stacking” effect. All other sources of income are counted first.
If your income is very low, you can sell your shares. The amount that fall below the adjusted amount described in the WSJ article will indeed have zero tax on the long-term capital gains and also the qualified dividends. You don’t have to wait until you retire in 8 - 10 years. Once your shares are vested you could sell them if you ever had a low income year. (e.g. if you lost your job and didn’t get another job immediately). Given the uncertainty of tax laws, there’s no way to know if this sweet loophole will last.
This is NOT an April Fool’s joke. It is real!
I would be delighted if this information helped you save a bundle on taxes.
Wendy
Some years ago, I did not take a distribution from my IRA one year. All my income that year was from dividends and long term cap gains, something over $40K. My Federal tax liability that year was zero. I did everything from scratch, by hand, three times, to make sure. Zero. I mailed in the return. The black helos have not come for me yet, so that must be the intended outcome: income from wealth, within limits, gets a free ride in Shiny-land, while the same amount of income from productive work gets taxed, a lot.
No. It means that you can sell shares such that all the long-term capital gains on those shares, up to a max of $89,250 taxable income will be taxed at 0%. The gains above that will be taxed at the next level long-term capital gains tax rate of 15% (plus a potential 3.8% medicare tax above a certain threshold). Then when you hit $553,851 taxable income, it’ll go up to 20% (plus 3.8% medicare on part of it).
Yes, with the the restrictions that @MarkR identified. Keep in mind, capital gains are a tax that rich people pay. Same with anything related to real estate. For that reason, Congress will always give very generous tax treatment to that type of income.
What you don’t want to do is have wage income. From a tax standpoint working for a living is the worst thing you can do.
