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How to pay ZERO TAXES on some kinds of investments...LEGALLY!
Sound too good to be true? Back in 2008, in an effort to reduce taxes for the middle class, Congress enacted something now called the Bush-Era Tax Cuts. These cuts cause the federal income tax rate on long-term capital gains and qualified dividends to be 0% when those gains and dividends fall within the 10% or 15% federal income tax rate brackets. This will be the case when your taxable income (not your gross income) does not exceed $73,800 for married joint-filing couples ($36,900 for singles). Need an example?
- A married couple may have wages totaling $ 100,000 and a capital gain of $ 10,000 for total income of $ 110,000, but after subtracting their exemptions and deductions of $ 40,000, their taxable income is $ 70,000. In this example, their $10,000 capital gain would not be taxed since their taxable income remained under $ 73,800!
So the key here is to keep taxable income as low as possible to keep some or all of your capital gains and qualified dividends taxed at the zero percent tax rate. Below are a few tips to accomplish this:
1) GIFT APPRECIATED STOCK - Consider giving your kids or relatives stock that would produce a capital gain instead of selling it outright. This will keep your taxable income down and the beneficiaries of your gift will probably be in a lower tax bracket than you, therefore incurring less tax than if you sold it. {Beware of the Kiddie Tax that could come into play on gifts to your children under age 24.} Another option, make a gift of stock to a qualified charity and receive a charitable contribution equal to the market value of the stock on the day of the gift. No capital gain to report since you didn’t sell the stock to the charity!
2) UTILIZE TAX FREE SECURITIES - The most obvious source of tax-free income is tax-exempt securities. You will need to evaluate the after-tax return on taxable investments to that of tax-exempt investments which are typically lower. If comparable, in some cases, it may be as simple as transferring assets from a taxable to a tax-exempt fund. Depending on the fund, the investment could be free of state tax also.
3) MAX OUT YOUR RETIREMENT CONTRIBUTIONS – Contribute the maximum to your pre-tax retirement account (401(k), 403(b)) especially if there is a match by your employer. If no plan is available from your employer, contribute to a traditional IRA. Don’t forget to fund the maximum into your Health Savings Account (H.S.A.) also. All of these options will reduce your taxable income.
4) PRE-PAY TAXES – If you know you may owe tax to state or local government, pay it by the end of the year and accelerate the deduction into the current year. The same tactic can be employed for your real estate taxes.
5) SELL LOSER STOCKS AND GIVE PROCEEDS TO CHARITY - Not all investment decisions turn out as planned. You can sell the stocks at a loss and deduct up to $ 3,000 of losses annually. You can gift the proceeds of the sale to your favorite charity to receive another tax deduction.
As you can see, there are a multitude of ways to reduce taxable income. You can benefit from a zero tax rate on some types of investment income. There are a few limited exceptions to the above rules. Please contact us to see what will work best for you and your family and how you may be able to benefit.