When is My Capital Gains Rate 0%?

With a tax planning opportunity for just about everything, seeking to pay 0% on capital gains is no exception. There are quite a few planning strategies you can utilize in order to realize tax-free earnings on profits from capital assets. 

The sale of capital assets, such as your home or investments (stocks, bonds, mutual funds, exchange-traded funds), can result in a realized gain. Capital gains are subject to a levy on the profit received from the sale and are usually taxed at a lower marginal rate than ordinary income. Any asset held for longer than a year is considered a long-term capital asset and taxed at rates of 0%, 15%, and 20% when sold. 

If you buy and sell a capital asset for profit in under a year, this transaction is considered a short-term capital gain and typically taxed as ordinary income. If you experience a loss, up to $3,000 can be deducted annually against your ordinary income. 

So, how do you qualify for the 0% capital gains tax rate? Single filers with income below $39,375 will qualify for this rate. If you’re married filing jointly, incomes of less than $78,750 will also qualify you for the 0% tax bracket. Most people, however, will fall into the 15% capital gains rate (up to $434,550 of income for single filers and up to $488,850 of income for married taxpayers filing jointly). Any amount above those thresholds lands at the highest 20% capital gains rate. 

Since most people fit somewhere in the middle, how can you leverage tax strategies to fall into the lowest bracket? Some common opportunity exists when a taxpayer is temporarily unemployed or experiences a fluctuation in income. 

If you anticipate—or strategically plan for—a lower than average annual income, you may consider tax planning opportunities that weren’t on the table before. Let’s say for example, you are married filing jointly and anticipate $65,000 of taxable income after taking the standard or itemized deductions this year. If you own investments outside of your IRA accounts that have unrealized long-term gains, you still have $13,750 before you reach the 15% capital gains bracket. Since there are no rules about future investments, you could realize the gains at a 0% capital gains rate and buy new shares within the same company or even invest in a new company. 

Another strategy involves charitable giving. Consider donating appreciated stock instead of cash. Donating appreciated stock directly to a charitable organization can completely avoid the capital gains tax. In addition, you may be eligible for a charitable contribution deduction of the full market value of the donated shares. 

There are also planning opportunities in the case of capital gains resulting from the sale of your primary residence. Although the same capital gains rates apply, there is a hearty exclusion available that may help you avoid paying tax on your gains at all. A single filer can exclude up to $250,000 of realized gains, and a married couple may exclude up to $500,000 on realized gains from the sale of their home, if they have lived in the residence for at least two of the past five years.

One of the most important ingredients in calculating capital gains tax on real estate is that the taxable gain is founded on the cost basis. Your cost basis consists of both your purchase price and the costs of renovating your home. 

For example, if you purchased a Santa Barbara home for $2 million and made some renovations for another $500,000 (bringing the cost basis up to $2.5 million), lived in it with your spouse for two of the past five years, you could turn around and sell it for $3 million without paying any capital gains tax on the sale of the property.

Those examples are only a few strategies to get your tax position at a 0% capital gains rate for the sale of capital assets. 

If you have any questions or are looking for creative tax planning opportunities, please contact me at grodriguez@bpw.com or (805) 963-7811.