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It’s natural to recover from portfolio losses, especially with S&P 500 down more than 20% during the year.
But you can still be profitable after years of growth, and the profits may qualify for a 0% tax rate, depending on your income.
These thresholds can be higher than you expect — even six figures on a couple’s combined income, financial experts say.
Dale Brown, chairman of the board of directors at Salem’s investment advisor in Winston-Salem, North Carolina, ranked sixth on CNBC’s 2022 FA 100 list.
But there are actually four rates – 0%, 15%, 20% and 23.8%, with Surcharge 3.8% for those with higher incomes. “I’ve had clients with low six-figure incomes and no taxes,” says Brown.
Here’s how: The “taxable income” usage rate, calculated by subtracting the larger amount of standard or itemized deductions from your adjusted gross income, is your income. minus the so-called “on line” deductions.
For 2022, you may be eligible for 0% long-term capital gains with taxable income of $41,675 or less for single applicants and $83,350 or less for married couples. general filing.
Six-figure earners may qualify for 0% interest
While a couple making $100,000 might claim they don’t qualify for the 0% long-term capital rate bracket, Brown said investors need to verify the numbers.
For example, let’s say a retired couple has $30,000 in tax-free interest, $25,000 in regular income, and $75,000 in long-term capital gains and dividends. Their total income is $100,000 because it doesn’t include tax-free interest.
After deducting the $27,000 standard deduction, they’re left with $73,000 in taxable income, which falls within the 0% long-term capital gains tax bracket for 2022.
Part of your income may be in the 0% bracket
Even if a couple’s taxable income is above $83,350, some of their income could still fall into the 0% long-term capital rate bracket, says Brown.
Assume the same retired couple has $30,000 in tax-free interest, $25,000 in regular income, and $100,000 in long-term capital gains and dividends.
In this case, their total income is $125,000 and taxable income is $98,000. Since the $27,000 standard deduction exceeds the $25,000 of regular income, $98,000 is purely for long-term capital gains and dividends.
This means that $83,350 is taxed at 0%, and the couple owes 15% long-term capital gains tax on the remaining $14,650.
That’s the benefit of the 0% bracket, says Brown.
Consider ‘tax profit’ in the 0% bracket
When the stock market goes down, many investors focus on harvest loss tax revenueor use losses to offset other profits.
But you can also discover the returns if your assets are still up year-over-year, says Cory Robinson, vice president and portfolio manager at Tom Johnson Investment Manager in Oklahoma City, which ranks 30th on the FA 100 list.
“The benefit is tax-free, whether it’s dividends or capital gains,” as long as you stay below the taxable income threshold, he says.
That’s the beauty of being profitable. You can reinvest immediately.
Cory Robinson
Vice President and Portfolio Manager at Tom Johnson Investment Management
For investors in the 0% bracket, there may be an opportunity to reduce taxes on future gains.
Since taxes are based on the difference between the value at sale and the original purchase price, you can sell the property for a profit and buy it back to increase the purchase price.
“That’s the beauty of taking profits: You can instantly reinvest,” says Robinson, explaining how investors don’t need to worry about the so-called wash sales rules.
While the wash-sell rule blocks harvested losses if you bought an “essentially identical” property within the 30-day period before or after the sale, the same rule doesn’t apply to gains, he said.
Profits in lower income years
Whether you’re selling properties for income or taking advantage of a long-term tax strategy, there can still be opportunities to profit in lower income years, Brown says.
For example, there could be an income gap if you retire but don’t immediately receive Social Security, a pension or withdraw money from retirement accounts before taxes, he said.
You may also have lower taxable income in a year when you lose your job temporarily, says Brown.
“The most important thing is time,” adds Robinson, explaining how important it is to estimate your taxable income before attempting to profit.
