How to Pay 0% in Capital Gains Tax

Speaker 1 (00:00):

Have you ever wondered how to pay less in capital gains tax? Well, today I'm gonna show you four ways how to pay 0% capital gains tax. Welcome in everybody. My name's Joe Allaria and this is episode 24 of the Retirement Power Hour. As I said today we are talking about how to pay 0% capital gains tax. We have four different strategies that I'm gonna show you today, but first, as we always do, we do have a listener question about social security and I wanna jump right into it because I get questions like this all the time. How do I file for social security? What is the best strategy? So lemme read you this question and then the answer this uh, individual says his name's David. David says, I'm 65 years old self-employed and I'm earning as an employee $36,000 per year. I do not want to retire but I want to collect social security benefits and keep working.

Speaker 1 (00:50):

So the key thing there is that David is 65. He is not yet hit his full retirement age, but he wants to keep working and he wants to file for social security benefits. He says, my estimated yearly social security is 26,000. I can earn 21,000 as an employee. My plan is to keep working and then at full retirement age collect $36,000 in wages from the business. Does this make sense? Well, what David is talking about here and what he's wondering about is something called the earnings test. The earnings test is something that social security does where if you haven't hit your full retirement age and you start collecting benefits and you make over a certain amount of money, then they withhold some of your benefits. It's not a tax, it's just a reduction in your benefits. In fact, let me read that to you. So social security will withhold $1 for every $2 of earnings above this lower income limit.

Speaker 1 (01:43):

Now the limit in 2023 is $21,240 without social security reducing his benefits. So he's wondering if this makes sense for him. So my response to you, David, is this, this question like many others, you have to be careful not to look at one thing in a vacuum. We have to look at the big picture. And so what I mentioned to David is it does sound like you understand the earnings test, but does it make sense for you to decrease your income by $15,000 a year just to save and not have and not run into that earnings test? 'cause the earnings test is gonna cost you about $7,500 a year. So you're gonna reduce your income by $15,000 a year just to not have your social security reduced by $7,500 a year. I don't know if that makes sense. It doesn't seem like it would make sense to me.

Speaker 1 (02:32):

Now I don't know what you're gonna do with the money that you were earning. You own your own business. So again, this question in a vacuum is hard to analyze. So this is a good time to remind all of the listeners out there. If you go to retirement power hour podcast.com, retirement power hour podcast.com, you can submit your question as David has done, or you can request a complimentary retirement analysis where we will dig into these issues and we'll look at the big picture for you. Try and help you make these types of decisions. We don't want you to leave money on the table. So I encourage you go to retirement power hour podcast.com. You can also leave a review and I would really appreciate your reviews. Uh, if you go to Spotify, apple, wherever you listen, wherever you watch YouTube and please leave us a review and we would greatly appreciate that.

Speaker 1 (03:22):

With that said, let's get into our main topic for the day, how to pay less taxes in one area of taxes is capital gains. Especially as you get close to the end of the year, people don't know how much they've had in capital gains, sometimes year to year. They can be surprised on their taxes when they go to file for their taxes in March or in April. So let's talk about this. What are four ways that you can pay 0% in capital gains tax? Well, first, before we go into the four strategies, we have to understand what capital gains tax is. It's often very misunderstood. Most people understand the marginal tax brackets that are out there. You know, right now we've got 10%, 12%, 22%, 24%. There's different income ranges that would determine what marginal bracket you are in. Now those are income tax brackets.

Speaker 1 (04:10):

What I'm talking about today are capital gains. Tax brackets and capital gains are when you sell a security, you sell a mutual fund, a stock, a bond, a bond fund, an ETF, and you've sold it for more than what you bought it for. That is gonna trigger a capital gain. Now, if you've held that security for less than one year, that would be a short term capital gain and that is gonna go over to your income tax bracket. Other things that go in those income tax brackets, your wages, your retirement distributions, that all goes to income. But when we talk about capital gains, we have to look at another bracket and there's only three different levels of tax, 0%, 15% and 20%. So today, again, we're gonna teach you how to stay in that 0% range if possible. So that's how the capital gains tax brackets work.

Speaker 1 (05:06):

And so once you understand that, then you can start to ask yourself, can I qualify in that 0% capital gains tax bracket range? So to answer that question, we need to talk about your income and understand what those ranges are. So in 2023, if you are a married filing jointly couple, then you can have taxable income of up to $89,250 and pay 0% capital gains. Now I'm gonna give you some numbers and I'm gonna come back to explain what taxable income is, but if you're single in 2023, you can have up to $44,625 in taxable income in 2024. Those, those limits go up to $94,050 for a married couple filing jointly and $47,025 for single tax filers. So those are the limits and it's all taxable income. That does not mean gross income, that means taxable income. So what is taxable income? Taxable income is your gross income, plus or minus adjustments to get you to that adjusted gross income number.

Speaker 1 (06:16):

And then you get to subtract out either a standard deduction or your itemized deductions. Now once you subtract that out, that is your taxable income. So let me give you an example here for for a moment. Let's say you earn as a married couple $80,000 per year. If you're retired, you've got $80,000 a year of gross income in 2023. Well that's gross income. Let's say you take the standard deduction and that standard deduction for a married couple is 27,700. And then, oh by the way, you're both over the age of 65. So tack on another 3000 of that. Your standard deduction is over $30,000. So if you made 80 and you deduct over 30, that means your taxable income is less than $50,000. So if you had any capital gains that you had not realized yet, what you could do is you go ahead and you could sell those positions, lock in the capital gains and pay 0% capital gains tax as long as your taxable income doesn't exceed in 2023 $89,250.

Speaker 1 (07:23):

Now again, why would people do this? Well, maybe this year you won't exceed that taxable income limit, but maybe in a couple years, once you start taking required minimum distributions, that might push you over that limit and it might cause you to start paying 15% capital gains tax once again. So as you monitor your income year to year, and this is by the way, a great thing that your financial advisor, your wealth advisor should be doing for you as you monitor your income, you should see year to year, can I sell some of my securities that have a gain on them? Can I sell those and buy them right back and lock in the gain? 'cause I know I'm gonna pay 0% capital gains tax if my income's low enough, can I go ahead and do this and pay 0% capital gains tax? It's called capital gain harvesting at 0% and it is completely within the tax code something that everyone should be monitoring every single year.

Speaker 1 (08:19):

So there's a little tax lesson for you. If your income is below those taxable income thresholds, you can pay 0% capital gains tax. But that's just one way. The second way to pay 0% capital gains tax is to donate shares of stock or shares of any security to a charity. Now this is typically best if someone is already giving to charity because like as I tell people, if you aren't giving a charity and then you start giving just to try and save some money on taxes, it's great you're helping a charity. You will get some tax breaks, but you're not, you're gonna come out net behind where you were before. Because if I give $10 and I save $2 in taxes, I'm still down $8. Now if I give $10 every year to charity and I do it in a different way that can get me more tax benefits, now I'm gonna be ahead.

Speaker 1 (09:12):

So that's really what we're talking about here. For folks that do want to donate to charity every year and that have done that and are going to continue to do that, donating appreciated shares of stocks or mutual funds or ETFs is a great way to give to charity because what that does is you don't sell the security, you donate the security directly, you don't sell it, you donate it to the charity, they receive the shares and you don't pay capital gains tax. Now you have to have long-term capital gains for this to work. So that's something that's very important. And obviously the stocks or the funds or the ETFs, they have to have capital gains on them. If they don't have capital gains unrealized, you don't want to gift them, it's not gonna benefit you in any way. So you need long-term capital gains to get this done.

Speaker 1 (10:04):

And you could also donate this not only to charity but to a donor advised fund. If you have a donor-advised fund set up, in fact, this is a great strategy to donate shares to a donor-advised fund. You can do a big amount all at one time and bunch a bunch of deductions together to get you the maximum tax benefits. And we do have materials on the retirement power hour podcast.com and also at Carson Allaria Wealth Management about different strategies for gifting, which we will include in the show notes. So make sure you check those out on different benefits and different ways to give. But this is another way to pay 0% capital gains tax if I gift my shares to a charity. Okay, two down, two to go. So how about number three? The third way to pay 0% capital gains tax is to plan ahead and build up losses through tax loss harvesting.

Speaker 1 (10:57):

So what do I mean by that? Well, when you invest in certain stocks or mutual funds, they may not go up right away if they have a loss on them, what you can do is sell those to lock in that loss to get the benefit, the tax benefit. And then as you accumulate losses, hopefully we don't have too many, but as you accumulate them over time, when you go to sell in the future, when you actually have gains on certain positions, any losses that you've sold and that you've locked in from the past can offset those future long-term capital gains. Now, a couple things that you wanna be aware of. If you are going to try and harvest losses from a stock, a stock fund, an ETFA bond. A bond fund, okay, you have to be very careful not to trigger something called a wash sale.

Speaker 1 (11:47):

Typically what folks do is they'll say, I have a a temporary, well, what I feel is a temporary loss, an unrealized loss right now on this mutual fund, a BC mutual fund, let's say it's a large growth mutual fund. So I'm gonna sell a b, c large growth mutual fund to lock in the loss. Now, investment 1 0 1 tells me I don't wanna stay out of the market, I wanna stay in the market because what if things rebound and then I miss out. So what you can't do is, hey, I'm gonna sell this fund today and buy it right back tomorrow. You cannot do that and that's gonna trigger the a wash sale and will negate the losses that you took from that sale. So the way the wash sale rule works and how to avoid a wash sale, the rule states that the tax loss will be disallowed if you buy the same security contract, option security, anything that is substantially identical, a substantially identical security within 30 days before or after the date you sold the loss generating investment.

Speaker 1 (12:54):

So if I want to sell a b, c large growth mutual fund, then I can't buy it again for at least 31 days. Also, if I think I'm going to sell a BC large cap growth mutual fund, I can't say, well, I'm gonna go ahead and buy it a week before 'cause I know I'm about to sell it and then sell it and, and take that loss. So there's a 30 day window on either side of the sale, a total period of 61 days. You cannot buy the security within essentially 61 days, either 30 days before, 30 days after the sale of the loss generating position. So what you can do is if you sell a b, c large growth mutual fund, then you wanna stay in the market, you can buy X, Y, Z, large cap growth mutual fund, something that's similar, it's not identical.

Speaker 1 (13:47):

You might buy a large cap ETF something that, again, a different type of security even better. But you cannot buy the same security back. It cannot happen right away. So if you bought something similar, you could wait 30 days, 31 days and then buy the original security back and you'll be totally fine. So build up those losses. Then when you have gains down the road, those gains can be offset. Buy those losses because you can carry those losses forward year to year. If you don't have any gains to offset the losses, you can use $3,000 of your losses against ordinary income, against your wages, against income from IRA distributions. Any type of income you can use up to $3,000 per year, you can't use more than that, but up to $3,000 per year against income. And then the rest of your losses will carry forward to the, to the future, to the point where you may need them.

Speaker 1 (14:43):

And number four, the fourth way to pay 0% capital gains tax is don't sell positions with unrealized gains. Don't sell them, leave them in the account and let your heirs inherit them. So this is a little bit of an indirect way to pay 0% 'cause it's really not you paying 0%, but it's your heirs paying 0%. What we're talking about here is if I pass away and I have a bunch of securities with unrealized gains, so I never sold them and I leave those to my children, you know, my sons, my daughters, whoever, my grandkids, they will get what's called a step up in cost basis. So they will not have to pay capital gains tax under the current law if they inherit those assets. Conversely, if I sell all my funds, my stocks because I wanna gift them to my children, grandchildren, who, whoever it may be, I will have to pay capital gains tax before I gift those securities or before I gift that money to my kids or grandkids.

Speaker 1 (15:56):

So the key is leaving these securities to your ears at death, not gifting prior to when you pass away. If you're able to hold onto them, if you, if you can do without the money, that is another very good way to pay 0% on capital gains. Hopefully you have a bunch of unrealized capital gains. As long as you just hold onto those and never sell them, your heirs will never pay capital gains tax. They'll get away with 0% capital gains tax. If they inherit those positions and sell them right away, they will get a new cost basis. And assuming that they can sell at the same price they inherited those positions, those securities, they'll pay 0% capital gains tax. Well, those are the four ways to pay 0% capital gains tax, four of the main ways. But when you start talking about taxes, you start talking about retirement, you start talking about charitable giving strategies and social security, a lot of questions come up and if anything was unclear today, here's what I encourage you to do.

Speaker 1 (16:58):

Go to retirement power hour podcast.com. When you go to the to our website, you'll be able to click submit your question, or more importantly, you'll be able to request your free complimentary analysis. If you click work with me, you'll be able to submit some information to set up a call with me. Help determine when you can su successfully and safely retire, will help determine if your investments are allocated in a way that is appropriate for you, given your age, given your situation. We'll look at Social Security, we'll look at Medicare, we'll look at taxes. So I encourage you to do that. It's a complimentary analysis. And for anyone with over $500,000, provide that service. If you go to retirement power hour podcast.com and click work with me, don't forget to leave us a review at Spotify, apple YouTube, or on our website retirement power hour podcast.com. And I appreciate you watching and listening today on how to pay 0% capital gains tax. Be sure to tune in next time to the Retirement Power Hour where we help listeners invest wiser and retire better. Take care.

Speaker 2 (18:04):

Thank you for listening to the Retirement Power Hour podcast. All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal, or investment advice. Investing involves risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an investment advisor representative of Carson Allaria Wealth Management, a registered investment advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but Car Ario Wealth Management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.