How The 0% Capital Gains Bracket Works

For single filers, you can make up to $48,350 in long term capital gains and pay 0% on that saving you up to $7,252 in taxes! Possibly more if you’re filing married.  Even though it may not always seem like it, you really have to see the big picture and understanding that saving $7,250 in taxes IS equal to receiving $7,250.

 What’s Capital Gains?

Capital gains is the amount of increase in value of a property compared to the price when you bought it.  The original price is called Basis.  Capital gains comes in 2 varieties.  Short term capital gains is for property held less than one year and long term capital gains is for over 1 year.

If you buy stock at $100 and it goes up to $200.  If you sell your stock within a year you owe short term capital gains.  If you hold it for a year and sell, that’s long term capital gains.

2017 Federal Tax Bracket:

Income Income tax bracket Short-term capital gains rate Long-term capital gains rate
Up to $9,325 10% 10% 0%
$9,326 to $37,950 15% 15% 0%
$37,951 to $91,900 25% 25% 15%
$91,901 to $191,650 28% 28% 15%
$191,651 to $416,700 33% 33% 15%
$416,701 to $418,400 35% 35% 15%
$418,401 and over 39.6% 39.6% 20%

Here’s the 2017 tax bracket for a single filer which we’ll use for this example.  If you’re married or head of household, you can test with different brackets to see which one will save you the most.  Also this is for USA federal taxes and state taxes vary state to state.

Most people are familiar with the 2nd column which is the tax bracket on your earned income you get from a job.  As you can see, short term capital gains taxed exactly as income, but the long term capital gains is how the rich get richer.  For up to $37,950, you are in the 0% long term capital gains bracket.

If you take into consideration a $6350 standard deduction (single filer) and a $4,050 personal exemption,  then a single filer can harvest up to $48,350 in long term capital gains!

How this chart works is you first take your normal income into account.  Let’s say that’s $30,000.  Then you add on your capital gains.  If you realize $10,000 in long term capital gains, you now made $40,000 and bumped up into a higher bracket, but won’t bump your normal income into a higher bracket as capital gains is calculated last.  Short term capital gains is just grouped into your normal income.

Capital Gains Harvesting

So the catch is that you have to be a relatively low earner to be the in 0% bracket. Chances are most people who have a lot of capital gains aren’t in this position because you probably earn money.  So who can take advantage of this?

  • If you’re retired or retiring, you should plan your distributions to maximize this tax break.
  • Maybe your business had a slow year and it’s pulled down your gross income.
  • If you lost your job or took a gap year you this may be helpful to you as well.

If you only made $20,000 this year due to whatever circumstances, you can still harvest $28,350 in capital gains.  What does that mean?  It means, if your stock portfolio over the years has increased in value, you can sell your shares (only after at least 1 year) and realize up to $28,350 in long term capital gain and re-buy the same stock instantly.  This will not change your portfolio, but it will update the basis (original cost).  You don’t really see any money now, but when you actually sell the shares in the future you will pay less tax since you re-bought at a higher price.  You have to think long term and take advantage of a year like this!

Side note: Selling for a loss and re-buying the same security instantly is called a wash sale and is illegal, but if you sell for a profit like the example above, you can re-buy the same stock instantly.

Here’s What I’m Doing

Well the reason i’m writing this article today is because I am going to be in this bracket for 2018.  So even though I haven’t even filed 2017 taxes yet, it is 2018 and things I do this year will affect my 2018 taxes.  Basically I quit my job mid 2017 and been living abroad working on this blog and various projects making little money.

One thing to consider, if you’re portfolio has quite a bit of gains and you’re planning on taking a long work sabbatical you may want to time it around the tax year. I worked and earned in half of 2017 so i’m unable to take advantage of that year, but for 2018, i’m planning on taking full advantage.  If you’re planning on taking a year off or 9 months off, think about following the tax year so you can take advantage of this. An extra $7,250 can really help when you’re traveling the world. ?

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