Did you know there’s a way to pay no taxes on certain capital gains? While the maximum capital gains tax rate can be as high as 23.8%, most taxpayers are subject to a 15% rate. However, under the right circumstances, your capital gains could be taxed at a 0% rate, allowing you to keep all of your investment profits. This tax break is more common than you might think, and with some strategic planning, you could benefit from it. Here’s what you need to know.
How to Qualify for the 0% Capital Gains Rate
To qualify for the 0% rate, you must hold the asset—whether it’s stocks, bonds, real estate, or other capital assets—for more than a year. This ensures that your gain qualifies for long-term capital gain treatment, which is taxed at a lower rate than short-term gains.
For 2024, the 0% capital gains rate applies to single taxpayers with taxable income up to $47,025 and married couples filing jointly with taxable income up to $94,050. This means that if your taxable income falls within these thresholds, you can sell your long-held assets without paying any tax on the profits.
Common Scenarios Where You Could Qualify
You don’t have to have a low income year to take advantage of the 0% rate, though that is one way to qualify. Here are some situations where the zero percent capital gains rate might apply to you:
- Temporary job loss: If you’ve been out of work or experienced a reduction in income, your taxable income might drop low enough to fall within the 0% threshold.
- Tax loss carryforward: If you have a loss from an S corporation, partnership, or other business activity, this loss can lower your taxable income, potentially allowing you to benefit from the 0% rate.
- Commission-based income: In years where your commission-based income dips, your total taxable income might be low enough to qualify for the 0% capital gains rate.
- Retirement or reduced work schedule: Retiring or moving to part-time work can lower your income significantly, opening up opportunities for tax-free capital gains.
Even if your income is higher, you may still be able to benefit. For example, a married couple with an income of $123,250 in 2024 would qualify for the 0% capital gains rate after subtracting the standard deduction of $29,200 for a married couple, leaving them with taxable income of $94,050—right at the threshold.
Know When to Take Advantage
Knowing when you qualify for the 0% rate is crucial, especially during years when your income fluctuates. Let’s look at an example:
Jack and Jill’s Retirement Strategy
Jack and Jill recently retired. They have mutual funds they’ve held for years and also have money in retirement accounts. In 2024, their income is $58,700, putting them well below the $94,050 threshold for married taxpayers filing jointly. Instead of withdrawing from their retirement accounts, which would increase their taxable income, Jack and Jill decide to sell mutual funds with $25,000 in long-term capital gains. Since their taxable income stays within the 0% bracket, they pay no taxes on these gains, saving them thousands of dollars!
Plan Your Tax Moves Wisely
As the year winds down, it’s worth taking a close look at your projected income. If you expect your income to fall within the 0% capital gains bracket, consider selling some long-term assets to realize tax-free gains. This can be a powerful tool for managing your investments and minimizing your tax liability.
Keep in mind, though, that other factors, such as paying taxes on Social Security benefits, can impact your overall tax picture. If you’re unsure about how the 0% capital gains rate applies to you, or if you’d like a review of your tax situation, reach out for assistance.
By understanding the 0% capital gains rate and planning accordingly, you can keep more of your investment returns and make smart decisions for your financial future.
