Published by FOX Business | February 20, 2024
U.S. tax code has a 0% rate on investment income – how to take advantage of it
Taxpayers who sold some investments last year may be able to employ an oft-overlooked tool to whittle down the taxes owed and qualify for a 0% rate.
There are three income-based tax brackets on long-term capital gains: 0%, 15% and 20%, as well as a 3.8% Medicare surcharge imposed on the wealthiest Americans.
For the 2024 tax-filing season, the 0% rate on long-term capital gains – any asset held for longer than a year – can be applied to taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly.
The income limits are also higher than they appear: That’s because the 0% rate is based on an individual’s taxable income, which is calculated by subtracting the standard deduction or a total of itemized deductions – whichever is greater – from your adjusted gross income. In 2023, the standard deduction was $13,850 for single filers and $27,700 for joint filers.
Nominally, that means the rate applies to a minimum of $58,475 for individuals and $116,950 for married couples.
But even for taxpayers who qualify for the rate, there are limitations.
“There’s a lot of confusion about how the 0% rate works,” Eric Bronnenkant, a certified financial planner and the head of tax at Betterment.com, told FOX Business last year. “The way I try to start the explanation is that there’s no such thing as an unlimited 0% rate.”
One important caveat is the concept of “stacking,” he said, in which ordinary income is used as the primary qualifier for the 0% rate.
For instance, if an individual had long-term capital gains and qualified dividends of $20,000 and earned $100,000, they may falsely believe they are eligible for the 0% rate. But because of the “stacking” principle – in which ordinary income is at the bottom and the capital gains are on the top – a $100,000 salary would push that individual into the 15% rate.
On top of that, there is a limit to how much investment income is tax-free. Even if taxpayers have no taxable income, the 0% rate on long-term capital gains only works up to the income-level threshold.
