Tax planning is a year-round activity. Smart investors are always looking for ways to minimize their tax liability, and with the potential for tax bracket increases, now is the perfect time to explore strategies to lock in favorable rates. Did you know that if your taxable income falls within a certain range, you might qualify for a 0% long-term capital gains tax rate? This presents a valuable opportunity to sell appreciated assets and rebuy them, effectively “locking in” tax-free gains.
At XOA TAX, we guide clients through these tax-saving strategies. In this blog post, we’ll explain how you can take advantage of the 0% long-term capital gains tax rate and potentially reduce your future tax burden.
Key Takeaways
- Understand the requirements for the 0% long-term capital gains tax rate.
- Learn how to “sell and rebuy” assets to lock in your current tax rate.
- Discover the potential benefits and drawbacks of this strategy.
- Get answers to common questions about tax-gain harvesting.
Understanding Long-Term Capital Gains Tax
When you sell an asset (like stocks, bonds, or real estate) that you’ve held for more than one year, any profit is a long-term capital gain. These gains are taxed at a lower rate than short-term gains (assets held for one year or less).
The tax rate you pay on your long-term capital gains depends on your taxable income and filing status. For 2024, the 0% rate applies to the following taxable income thresholds:
Long-term Capital Gains Tax Rates for 2024
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $47,025 | $47,026 – $518,900 | Over $518,900 |
| Married Joint | Up to $94,050 | $94,051 – $583,750 | Over $583,750 |
| Married Separate | Up to $47,025 | $47,026 – $291,850 | Over $291,850 |
| Head of Household | Up to $63,000 | $63,001 – $551,350 | Over $551,350 |
You can find the complete capital gains tax rate schedule on the IRS website.
How to Lock in 0% Capital Gains Tax
The strategy is simple:
- Identify appreciated assets: Review your investment portfolio and locate assets you’ve held for over a year that have increased in value.
- Sell those assets: Sell enough of the asset to realize a gain that keeps you within the 0% long-term capital gains bracket for your filing status.
- Immediately rebuy the same asset: Repurchase the same asset with the proceeds from the sale. This resets your cost basis (the original price you paid).
Why This Works
By selling and immediately rebuying, you “lock in” your gains at the current 0% tax rate. If tax brackets increase in the future, you’ve secured your tax-free gains. When you eventually sell the asset again, your gains will be calculated based on the new, higher cost basis, potentially reducing your future tax liability.
Example
Let’s say you’re a single filer with a taxable income of $30,000. You own shares of stock purchased for $10,000, now worth $20,000. You could sell a portion of these shares, realizing a gain of up to $17,025 ($47,025 threshold – $30,000 taxable income), and immediately rebuy them. This locks in $17,025 of tax-free gains.
Potential Drawbacks
While this strategy can be effective, consider these points:
- Transaction costs: Brokerage commissions and fees can reduce your gains.
- Short-term market fluctuations: The asset’s price could drop after you sell and before you rebuy, affecting your overall return.
Important Additional Considerations
- State Taxes: While you may qualify for 0% federal capital gains tax, your state may still tax these gains. It’s essential to consider your state’s specific regulations.
- Wash Sale Rule: Unlike tax-loss harvesting, the wash sale rule does not apply to gains, making this strategy more flexible.
- Net Investment Income Tax (NIIT): High-income taxpayers should be aware of the additional 3.8% NIIT that may apply to investment income above certain thresholds.
Year-End Planning
Review your taxable income projections before December to ensure you stay within the 0% bracket threshold. Remember that other year-end income or adjustments could affect your total taxable income.
FAQs
Is this strategy legal?
Yes, this is a legal tax planning strategy known as tax-gain harvesting.
What types of assets can I use this strategy for?
This strategy generally applies to assets held in taxable brokerage accounts, such as stocks, bonds, and mutual funds.
Can I use this strategy for my retirement accounts?
No, this strategy is not applicable to tax-advantaged retirement accounts like 401(k)s or IRAs, as these accounts have their own tax rules and benefits.
What if I expect my income to increase significantly in the future?
If you anticipate moving into a higher tax bracket soon, this strategy becomes even more beneficial.
Does selling assets affect other tax benefits or credits?
Yes, increasing your adjusted gross income through capital gains could affect income-based tax benefits, deductions, and credits. Consider the total tax impact before implementing this strategy.
Connecting with XOA TAX
Navigating tax laws and optimizing your investment strategy can be complex. At XOA TAX, our experienced CPAs can help you develop a personalized tax plan. Contact us today for a consultation:
Website: https://www.xoatax.com/
Phone: +1 (714) 594-6986
Email: [email protected]
Contact Page: https://www.xoatax.com/contact-us/
Disclaimer: This post is for informational purposes only and does not provide legal, tax, or financial advice. Laws, regulations, and tax rates can change often and vary significantly by state and locality. This communication is not intended to be a solicitation, and XOA TAX does not provide legal advice. XOA TAX does not assume any obligation to update or revise the information to reflect changes in laws, regulations, or other factors. For further guidance, refer to IRS Circular 230. Please consult a professional advisor for advice specific to your situation.
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