First-time investors may spend a great deal of time and effort researching the best possible investment opportunities—but fail to take into consideration the tax consequences. What they may not know is that spending just a portion of that time on tax planning can save some or even all of their profits from taxation. Whether your clients are involved in real property, stocks, or trending cryptocurrency, they can benefit from working with a Certified Tax Planner to anticipate the moves they need to make to reduce taxes before selling their investment.
By engaging in advance planning and using timing to their advantage, taxpayers can often sidestep hefty tax bills. In this article, we will review one of the simplest timing strategies: leveraging the 0% capital gains tax rate.
Qualifying for the 0% Tax Rate
To secure the 0% tax rate, the taxpayer needs to determine their plan before selling their property or investment. Until that investment is sold it is not considered taxable income, so there is still potential to reduce the tax impact. Remember that the 0% tax rate only applies to long-term capital gains. An asset must be held by the taxpayer for at least one year for the gain to be considered “long-term.” So if a client has owned a certain amount of stock for 10 or 11 months and they are itching to get rid of it, you may want to advise them to hold onto that stock for a full 12 months if they would qualify for that 0% tax rate.
The other key factors are the taxpayer’s filing status and taxable income. To qualify for the 0% tax rate, the taxpayer needs to fall within one of these thresholds (for assets sold in 2023):
- Single or Married Filing Separately: $0 – $44,625 in taxable income
- Head of Household: $0 – $59,750 in taxable income
- Married Filing Jointly: $0 – $89,250 in taxable income
Depending on the taxpayer’s filing status and available deductions to lower their taxable income, that 0% tax rate could be easily attainable and worth incorporating into their tax plan.
The 0% long-term capital gains rate can also apply for business assets. If a taxpayer is holding an asset as an investment through their pass-through business, when they sell that asset it is recorded as capital income and then reported on their personal tax return as the owner.
When to Factor the 0% Rate into a Tax Plan
A number of different life circumstances could put a taxpayer in a prime position to save money on their capital gains:
Younger Taxpayers. Simply because they are newer to their careers and typically have a lower income, younger clients can often benefit from the 0% rate, so now may be the time to begin buying and selling investments and taking advantage of those tax-free gains.
Reductions in Income. Taxpayers who are temporarily in a lower tax bracket should evaluate whether they can take advantage of a lower capital gains rate. This could apply to people who:
- have losses in their business
- sold their business and are on sabbatical
- are on family leave because they had a baby
- have just retired and are currently living on their savings
For these taxpayers, now could be the time to lock in the power of that 0% rate. Remember that this is not a year-end “hack” that can typically be used at the last minute to secure tax savings. You will need to work with taxpayers as early in the year as possible to evaluate their finances and make use of this benefit.
High-Income Earners with Children. If taxpayers have investments with unrealized gains, a common tax strategy is to gift the investment to their children to avoid immediate taxation. On the one hand, this can be a powerful strategy if the taxpayer would normally be subject to the 3.8% NIIT or the 20% long-term capital gains rate. On the other hand, this strategy does not always result in a lower tax liability because of the “Kiddie Tax”—the levy on a child’s investment or other unearned income.
Under the Kiddie Tax, if the “child” receiving the gift is either under age 18 or a full-time student under age 24, the gain will be taxed as follows:
- The first $1,150 in unearned income is tax-free
- The second $1,150 is taxed at the child’s marginal tax rate
- The remaining amount is taxed at the parent’s marginal tax rate
Depending on the total amount of gain and both parties’ tax rates that year, making a gift may or may not result in lower taxes. This is where a Certified Tax Planner can bring a high level of value to clients by helping them weigh possible courses of action and select the one that will bring the most benefits.
Summary
Every tax planner’s goal is to secure tax-free income for their clients, and sometimes that goal can become a reality through the 0% capital gains tax rate. Timing and advance planning is essential for reducing capital gains tax, so you may want to invest time in educating taxpayers on the qualifications for the 0% rate and the life circumstances that make it an accessible strategy. For advanced training on tax planning for investments and other high-value services, sign up to become a Certified Tax Planner today.
