Current tax law applies a 0% long-term capital gains rate to the extent long-term capital gains fall within the bottom two tax brackets. This can be a great planning opportunity, but it is important to understand the mechanics of the 0% long-term capital gains rate to make sure it makes sense for your situation.
In 2018, there are three tax brackets for long-term capital gains, as shown below:
|Long-Term Capital Gains Bracket||Taxable Income (Single Filers)||Taxable Income (Married Filing Jointly)|
|0%||Up to $38,600||Up to $77,200|
|20%||Over $425,800||Over $479,000|
As with ordinary income tax brackets, the long-term capital gains tax brackets are graduated, and income that crosses out of one bracket falls into the next. This means that the 0% capital gains rate only applies until crossing the $77,200 threshold (for married couples). This gets even more complicated when you include your ordinary income (i.e., wages), which has its own set of brackets. All of this income is mixed together to increase your total income, but each type of income has its own tax bracket/tax rate.
In short, there is potential for significant tax planning if your ordinary income, less deductions, falls below that 0% capital gain threshold. Specifically, you can intentionally realize long-term capital gains without incurring any taxes.
When Might This Be Applicable?
- You have a year of low income and a concentrated stock holding. If the stock is at a long-term capital gain, you can opportunistically trim your concentrated holding without owing any capital gains.
- You have a year of low income. Whether you have a concentrated holding or not, selling stock at a long-term capital gain without owing any taxes could still be attractive. Even if it’s a stock that you want to retain, you can sell it then buy it back right away to “reset” the cost basis.
- When utilizing the 0% capital gains tax bracket you must coordinate with all your other financial planning strategies. Depending on your situation, we might recommend other income-generating strategies in your low-income year, such as a Roth conversion, Traditional IRA distribution, or stock option exercise just to name a few.
- You must also pay attention to how the additional capital gains affect your tax picture. For example, realizing additional capital gains at a 0% tax rate still increases your Adjusted Gross Income (AGI), and that can impact your tax deductions (i.e., medical expenses) or can phase you out of certain tax credits that are tied to your AGI.
In reality, the opportunity to take advantage of the 0% capital gains rate is limited and we might prefer alternate strategies, but it can be significant in the correct situation.
As always, it’s important to discuss these strategies with your Wealth Advisor and tax professional before you make any final decisions. Please reach out to your Wealth Advisor to discuss these potential tax planning opportunities if you find yourself in a year of lower income.
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.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
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.