Understanding the Tax Advantage and Strategies to Leverage It
0% Tax Rate on Investments: How You (or Your Loved Ones) Can Benefit
The federal tax code offers a significant tax advantage – a 0% rate on net long-term capital gains (LTCGs) and qualified dividends earned in taxable accounts. This applies to a variety of investment assets, including stocks, bonds, and real estate held outside of retirement accounts. Let’s explore how you can potentially leverage this benefit, even if your income seems too high to qualify on your own.
Understanding Tax Brackets for LTCGs and Qualified Dividends
The tax bracket you fall into for LTCGs and qualified dividends is determined by your taxable income, which includes these gains and dividends themselves. Here’s a breakdown of the 2024 federal tax brackets:
| Taxable Income | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 - $47,025 | $0 – $94,050 | $0 – $63,000 |
| 15% | $47,026 – $518,900 | $94,051 – $583,750 | $63,001 – $583,750 |
| 20% | $518,901 and up | $583,751 and up | $583,751 and up |
Important: These brackets are adjusted for inflation annually.
Who Can Benefit from the 0% Rate?
The 0% rate applies specifically to net LTCGs and dividends that fall within the corresponding tax brackets. The key takeaway? You can still qualify for this favorable rate even with a healthy income.
For instance, let’s say Brittany and Brian are married and file jointly. With two dependent children and claiming the standard deduction, they could have an adjusted gross income (including LTCGs and dividends) of up to $123,250 (prior to the standard deduction) and remain within the 0% bracket on the LTCG and qualified dividends.
“Many investors qualify for a 0% federal income tax rate on long-term capital gains and qualified dividends held in taxable accounts.”
Tax-Smart Gifting Strategies
If your income disqualifies you from the 0% rate, you might have loved ones in a lower tax bracket who could benefit. Here’s where tax-smart gifting comes in:
- Gifting Appreciated Investments: Consider gifting appreciated assets to loved ones in a lower tax bracket. Once they sell the investments (held for more than a year), they’ll pay 0% capital gains tax.
- Gifting Dividend-Paying Stocks: Gifting dividend-paying stocks allows the recipient to potentially enjoy tax-free dividends if they fall within their 0% tax bracket.
Important: The “kiddie tax” can apply to unearned income of certain children under 24, potentially taxing it at the parent’s marginal tax rate.
Gift Tax Considerations
The annual gift tax exclusion allows you to give up to $18,000 per recipient in 2024 without federal gift or estate tax consequences. Married couples can double that amount. Exceeding this limit might require dipping into your unified federal gift and estate tax exemption.
A Potential Time-Limited Opportunity
The 0% rate on LTCGs and qualified dividends might not be permanent. Congress could adjust tax rates in the future. Consider consulting a tax advisor to explore how you or your loved ones can strategically benefit from this tax advantage.
Questions?
Tax, Accounting, and Advisory Services
Matt’s background in federal, state, and local tax enables him to provide extensive services to the firm’s clients in the areas of tax compliance and consulting across a spectrum of industries.