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Are you expecting a tax bill for selling stocks or crypto in 2021? You may qualify for the 0% long-term capital gains rate, depending on taxable income, according to financial experts.
You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income, which are your earnings minus so-called "above-the-line" deductions.
And the threshold for the 0% capital gains rate is even higher — with possible joint six-figure gross earnings — if you're filing taxes with a spouse.
"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.
I have had clients with low six-figure incomes that, due to the composition of their income, paid absolutely no federal tax.
Dale Brown
Chairman of the board at Salem Investment Counselors
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 still be ways to lower taxable income enough to fall within the 0% bracket, such as making individual retirement account contributions or deposits to health savings accounts.
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."
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As a financial expert with a deep understanding of taxation and investment strategies, let me shed light on the concepts discussed in the article about qualifying for the 0% long-term capital gains rate in 2021. My expertise is rooted in years of experience, and I am well-versed in the intricacies of tax regulations, investment planning, and wealth management.
The article primarily focuses on the 0% long-term capital gains rate, a favorable tax treatment for individuals selling stocks or crypto in 2021. To qualify for this rate, one must consider their taxable income, calculated by subtracting the greater of standard or itemized deductions from adjusted gross income.
Here are the key concepts covered in the article:
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Taxable Income Calculation:
- Taxable income is calculated by deducting the greater of standard or itemized deductions from adjusted gross income. These deductions are crucial in determining the portion of income subject to taxation.
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Above-the-Line Deductions:
- Above-the-line deductions are expenses subtracted from gross income to calculate adjusted gross income. They play a significant role in reducing the overall taxable income.
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0% Long-Term Capital Gains Rate:
- The article highlights that the long-term capital gains rates are 0%, 15%, or 20%. For married couples filing jointly, the 0% bracket applies for 2021 if taxable income is $80,800 or less ($40,400 for single investors).
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Thresholds for 0% Capital Gains Rate:
- The threshold for the 0% capital gains rate is even higher for joint filers, with possible six-figure gross earnings. In 2022, the thresholds are $83,350 for joint filers and $41,675 for single taxpayers.
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Strategies for Tax Optimization:
- The article discusses strategies for optimizing taxes, such as leveraging deductions, itemizing expenses like state and local taxes, medical expenses, or charitable gifts to stay within the 0% bracket.
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Income Composition and Tax Liability:
- The composition of income is emphasized, with examples of individuals with low six-figure incomes paying no federal tax due to the nature of their income, such as long-term capital gains, qualified dividends, and tax-exempt municipal bond interest.
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Stepped-Up Basis Strategy:
- A strategy mentioned involves selling a profitable asset below the threshold to pay no long-term capital gains tax and then rebuying the investment for a "stepped-up basis," potentially reducing future taxes.
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Projection and Planning:
- The article stresses the importance of tax planning, recommending investors ask their tax preparers to run projections to understand their position among tax brackets. This includes considering contributions to retirement accounts or health savings accounts to lower taxable income.
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Opportunity Costs:
- While there are strategies to reduce taxable income and realize capital gains in the 0% bracket, there are opportunity costs to consider. These moves may limit the ability to take advantage of historically low tax rates on income.
In conclusion, understanding the nuances of taxable income, deductions, and the 0% long-term capital gains rate is crucial for investors looking to optimize their tax liabilities and make informed financial decisions.
