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After a year of double-digit stock market growth, investors may be looking to cash in some gains from brokerage accounts. And some filers may take profits without a tax bill, even with a six-figure income, experts say.
“A lot of people aren’t aware there’s a 0% tax rate on long-term capital gains, depending on the level of other income,” said Dale Brown, chairman of the board at Salem Investment Counselors in Winston-Salem, North Carolina, which ranked second on CNBC’s 2021 FA 100 list.
Long-term capital gains rates are 0%, 15% or 20%, and married couples filing together fall into the 0% bracket for 2021 with taxable income of $80,800 or less ($40,400 for single investors).
The 0% thresholds rise to $83,350 for joint filers and $41,675 for single taxpayers in 2022.
For example, let’s say a married couple filing together makes a joint gross income of $100,000 for 2021.
With the $25,100 standard deduction, common for joint filers, the couple’s taxable income drops to $74,900, which is below the $80,800 threshold for 0% long-term capital gains tax.
If the couple has itemized deductions above $25,100 — such as state and local taxes, medical expenses or charitable gifts — they may claim a higher write-off and earn more income while staying below the limits, Brown said.
And depending on the couple’s type of income, there’s potential for an even lower tax bill.
“I have had clients with low six-figure incomes that, due to the composition of their income, paid absolutely no federal tax,” Brown said, explaining how someone with only long-term capital gains, qualified dividends and tax-exempt municipal bond interest may not have taxable income.
Another strategy is someone under the threshold may sell a profitable asset, pay no long-term capital gains tax and rebuy the investment for a so-called “stepped-up basis,” adjusting the purchase price to the current value for lower taxes in the future, Brown said.
However, investors need to be mindful of how much they sell from a taxable portfolio, as the tactic boosts income and may exceed the thresholds or trigger other consequences, he said.
“Investors should ask their tax preparer to run a projection for this year to see exactly where they fall among the brackets,” said Juan Ros, certified financial planner at Forum Financial Management, LP in Thousand Oaks, California.
There may be ways to lower taxable income enough to fall within the 0% bracket, such as making 401(k) contributions or deposits to health savings accounts, Ros said.
However, there are other opportunity costs to consider, said Judson Meinhart, CFP and manager of financial planning at Parsec Financial in Winston-Salem, North Carolina.
“All of these moves are great to reduce current income and potentially realize capital gains in the 0% bracket,” he said. “But it limits your ability to pay taxes on income at today’s historically low rates.”