Current law allows tax payers in the bottom two income tax brackets to realize capital gains without paying capital gains tax.
If you belong to this group, there is a maximum amount that you can sell and still pay zero capital gains tax. Only those capital gains that, when added to your taxable income, still put you in the 15% bracket or below are taxed at 0%. Taxable income is after all deductions and exemptions.
For example, a married couple has income (before deductions) of $70,000, and deductions and exemptions of $56,400. This results in taxable income of $13,600, and the couple would have the ability to generate approximately $55,000 of capital gains and not pay any federal capital gains tax, as the top of the 15% federal tax bracket for married filing jointly is $70,700. Note the relevant number is your taxable income, not AGI (adjusted gross income).
If you find yourself in this tax situation, 2012 may be a good year to consider resetting cost basis in a taxable account, as tax rates are scheduled to increase next year and the availability of a 0% capital gains tax for the bottom two income tax brackets is potentially vanishing. However, please be sure to consult with your Wealth Manager and tax advisor before proceeding with the strategy outlined above as there are potential roadblocks to consider. For example, one caveat is that realizing capital gains (even at 0% tax) can expose more of a retiree’s Social Security income to tax.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
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This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.