One Way Retirees Could Pay 0% in Capital Gains Taxes
Holding onto stock shares for fear of a big tax bill? Think again. If you can manage your income right, you may not have to pay any taxes at all when you sell.
Could your capital gains bill be lower than you think? Most people are surprised to learn that instead of a uniform rate, there are actually three federal long-term capital gains tax rates:
- 20% if you’re in the top marginal tax bracket of 39.6% (e.g., those filing jointly with incomes of $470,701 and above, or singles making $418,401 and above)
- 15% if you’re in all other tax brackets except the bottom two (e.g., those with taxable incomes of $75,901 to $470,700 for those filing jointly or $37,951 to $418,400 for singles)
- 0% if you’re in the lowest two tax brackets (e.g., taxable income under $75,900 for those filing jointly or $37,950 for singles)
To keep things simple, the rates above ignore the 3.8% net investment income tax that kicks in at higher income levels. We’ll also limit the discussion to securities such as stocks and bonds, since more complicated assets (e.g., rental properties or collectibles) entail additional rules.
Qualifying for the Zero Percent Rate
As you can see, the magic number is $75,900 for couples, with a lower threshold for other filing statuses (Single, Head of Household, etc.). Because capital gains taxes are based upon your taxable income rather than your gross income, more people enjoy the 0% rate than you might think.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For example, assume a retired couple has $90,000 of gross income. If both spouses are over age 65, their standard deduction and personal exemptions total $23,300, bringing their taxable income down to $66,700. This couple would therefore qualify by virtue of being in one of the two lowest tax brackets.
Even if your net worth is high, this still may be applicable to you. Unless you have very high pension income or required minimum distributions, you potentially have a great deal of control over your taxable income. Creating a low-tax year in order to realize long-term gains may be a powerful strategy.
Planning for Retirement
If you’re about to retire and you own appreciated positions, this could be a key piece of an integrated distribution plan.
For example, consider a married couple who retires together at age 62, with $200,000 in low-basis stock. If they defer Social Security benefits and IRA withdrawals, they will have virtually no taxable income (assuming no pension benefits exist). They could sell the stock early in retirement with little or no tax consequences, and live off the proceeds. During that time, their IRAs could continue growing. Best of all, deferring Social Security boosts the monthly payout once those benefits begin. This is a powerful example of how smart planning can simultaneously bolster several aspects of your retirement.
The Details
There’s a limit to the amount of capital gains that qualify for the 0% rate. The 0% rate applies only to the extent you are below the top of the 15% income tax bracket.
For example, assume a married couple has taxable income of $55,900, which is $20,000 below the $75,900 top of the 15% tax bracket. In that event, only the first $20,000 of long-term capital gains would be taxable at 0%. If their taxable income were $35,900, up to $40,000 of long-term capital gains would enjoy the 0% rate. Further gains would be taxed at 15%. If the taxpayer had a large enough gain, eventually some of it would be taxable at 20%. Therefore, if you have a large amount of gains, you might consider spreading any sale out over several tax years.
Another important caveat is if you are receiving Social Security, capital gains can cause a greater percentage of these benefits to be subject to income taxes. So, even if you pay no capital gains taxes, these gains may cause your taxes to increase in other ways. Be sure to include your tax adviser in the process, or run your own calculations.
Asset-Allocation Implications
Capital gains tax treatment only applies to stocks held outside of retirement accounts. Therefore, in retirement, you might want to tilt your stock allocation higher in your non-retirement accounts. To keep your overall asset allocation intact, you could increase your bond allocation accordingly in your retirement accounts (IRAs, 401(k)s, etc.).
As an added bonus, the long-term capital gains tax rates discussed above apply to qualified dividends as well. Those who plan well could enjoy a significant increase in their spendable income.
Bottom Line
If you’re holding onto a stock simply because you don’t want to trigger capital gains taxes, you might be able to have your cake and eat it too.
The 0% long-term capital gains rate is just one of many ways retirees with a well-planned distribution strategy can get more from their money. As always, keep your CPA and other advisers involved to ensure a coordinated effort on all fronts.
Yoder Wealth Management does not provide tax advice.
-
Will IRS Budget Cuts Disrupt Tax Season? What You Need to KnowTaxes The 2026 tax season could be an unprecedented one for the IRS. Here’s how you can be proactive to keep up with the status of your return.
-
The 1-Month Rule for Setting Your Car Insurance DeductibleThe ideal car insurance deductible balances risk and savings. Here's how to find it.
-
Yes, Artificial Intelligence Stocks Are BoomingIt's fair to ask about the latest tech boom, "Is it really different this time?"
-
I'm an Estate Planning Attorney: These Are the Estate Plan Details You Need to Discuss (And What to Keep Private)Gen Xers and Millennials would like to know if they're going to inherit (and how much), but Baby Boomers in general don't like to talk about money. What to do?
-
I'm a Financial Adviser: This Is How You Can Minimize the Damage of Bad Market Timing at RetirementPoor investment returns early in retirement on top of withdrawals can quickly drain your savings. The ideal plan helps prevent having to sell assets at a loss.
-
'You Owe Me a Refund': Readers Report Challenging Their Attorneys' BillsThe article about lawyers billing clients for hours of work that AI did in seconds generated quite a response. One law firm even called a staff meeting.
-
7 Questions to Help Kick Off an Estate Planning Talk With Your ParentsIt can be hard for aging parents to discuss estate plans — and for adult kids to broach the topic. Here are seven questions to get the conversation started
-
Down But Not Out: 4 Reasons Why the Dollar Remains the World HeavyweightThe dollar may have taken a beating lately, but it's unlikely to be overtaken as the leading reserve currency any time soon. What's behind its staying power?
-
What Not to Do After Inheriting Wealth: 4 Mistakes That Could Cost You EverythingGen X and Millennials are expected to receive trillions of dollars in inheritance. Unless it's managed properly, the money could slip through their fingers.
-
'The Money Prism' Solves Retirement Money's Biggest Headache: Here's HowThis simple, three-zone system (Blue for bills, Green for paycheck, Red for growth) helps you organize your retirement savings by purpose and time.
-
No, AI Can't Plan Your Retirement: This (Human) Investment Adviser Explains WhyAI has infinite uses. But creating an accurate retirement strategy based on your unique goals is one place where its possibilities seem lacking.
