Kelly Bullis: Use the zero percent capital gains rate to maximize savings

Anybody out there dabbling in the stock market? Do you own any qualified dividend producing stock? Here are some thoughts on how to maximize your tax savings.

First, you need to know the “rules” of the game. Basically, if your tax bracket is no higher than 15 percent, then any income earned on Capital Gains and/or Qualified Dividends is taxed at zero percent until such income pushes you into the 25 percent tax bracket. You read that right. Zero percent! (The current tax charts indicate if you’re single, your income hits that 25 percent bracket at $37,450 and for married folks it hits at $74,900).

If your income is just a little higher than that 25 percent tax bracket threshold, you can do a few things to get it down below that threshold. That saves you two taxes! The extra deductions will save regular tax and also, by lowering your taxable income below the 25 percent tax bracket, it will cause your Capital Gains and/or Qualified Dividends to be taxed at zero percent.

If you itemize or are close to having enough to itemize, going through your receipts might come up with enough additional itemized deductions to get you out of the 25 percent bracket. You might be eligible to make an IRA contribution. If you have rental income, more expenses found results in lower taxable income. You get the idea. No fair making up “pretend” expenses. You must find real missed expenses you’re entitled to take.

There’s a downside if you have Social Security income. Taking more zero taxed Capital Gains and/or Qualified Dividends could drive up the amount of Social Security benefits subject to tax. This may or may not be an issue, but you should be aware of this quirk and factor it into your planning.

If you have enough Capital Gains and/or Qualified Dividend income there’s no way to avoid the regular Capital Gains tax, you might find yourself having to pay the 3.8 percent Medicare surtax (Obamacare) which applies to net investment income for singles with modified Adjusted Gross Income more than $200,000 and marrieds more than $250,000. You could switch some of your income to Municipal Bonds and you could also elect to cash in on stocks that have accumulated losses to offset your gains.

Another thought — if you can — consider an installment sale to stretch out a large gain over multiple years, thus lowering the taxable amount to lower tax brackets and getting under the threshold for the surtax.

All this reminds me of the two Eskimos sitting in a kayak. They were getting really cold, so they lit a fire in their boat. Soon, it burned up and sank, proving once again you can’t have your kayak and heat it too. I know! Very punny!

Proverbs 16:19 says, “Better to be of a humble spirit with the lowly, than to divide the spoil with the proud.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. He’s on the web at and on Facebook.


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