How to Pay 0% Taxes on Long-Term Capital Gains and Dividends!

Did you know you could pay 0% taxes on your capital gains and your dividends? Well, you can, and I’m gonna show you how to do it in this video.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of the Retirement Income Show, and CERTIFIED FINANCIAL PLANNER™ Professional (CFP®).

When we’re doing planning for clients, retirement income planning, and I’m sitting across the table from someone and I say, look, if we do this right here, we can get you into the 0% tax bracket for long term capital gains, and dividends, this means the income that we’ll have in retirement would be tax free if it comes from dividends, and we qualify in that range, and the long term capital gains, we could sell some of these gains that we have, and not pay any taxes on it.

Oftentimes the look I get back at me is one of astonishment. Troy, I had no idea that I could pay 0% taxes on my long term gains, and also my dividends. Well, you can. The first part of doing this, though, is you have to understand how the law works. So when we, this is for 2019 tax rates, if you’re a single filer and your taxable income is beneath 39,375, then you are in the 0% tax bracket for long term gains and dividends. If you are in the married filing jointly bracket and your taxable income is 78,750 or below, you are in the 0% tax bracket for long term gains and dividends.

Now, it’s important to keep in mind here that your taxable income, that is the amount after your deductions. So if you’re married filing jointly, you can have over $100,000 of adjusted gross income, you take your deduction, that’ll get you beneath the 78 750, and your long term capital gains and your dividends will be tax free.
Here’s the head of household bracket, 0 to 52,750. And then if you’re married filing separate, it’s the same as the single filing bracket, 39 375.

Now, when it comes to retirement income planning, we have to be cognizant of where we’re taking our income from and what that impact has on our overall tax return. So this is where, from my standpoint, one of the reasons why I really love retirement income planning and helping our clients figure this out, is where we take the income from, whether it’s from our IRA, how much are we getting in Social Security, how much of that Social Security is taxed depends on your provisional income, And how much is coming from capital gains and dividends. All of that works together to tell us what our Adjusted Gross Income, what our taxable income is, And that’s how we can manage what’s going on the tax return here to keep in that 0% tax bracket for long term gains or dividends.

What we have to often decide in retirement is do we want to pay less taxes today? Or do we want to pay less taxes over the course of retirement? And what I mean by that is, a lot of times we’ll talk to clients about getting them into the 0% tax bracket here for dividends and long term capital gains, but then we do a Roth conversion analysis and we see it’s possible to save maybe three, four or $500,000 of income taxes over the course of retirement by doing conversions, a lot of times they’ll say, Troy, I’d rather save the larger amount of money over the course of my retirement, so we’ll do Roth conversions in these years, which will bump us above these thresholds and we’ll pay tax on our long term capital gains and dividends, but over the course of retirement, they’ll pay less taxes.

The point I want to convey here is that your overall goals, what’s important to you in retirement, your longevity, your health, your risk tolerance, how the portfolio is designed, how much income you need, your concerns about long term care, healthcare expenses, future inflation, all of these things work together and I recommend working with a retirement planner, somebody who understands how these different dominoes connect, and when you tip one over what else does it tip over.

Last thing I want to point out here is when we cross over this threshold here, all of your dividends do not all of a sudden become taxable at the 15% rate, long term capital gains rate of 15%. There is a phasing in. So we can still go over these thresholds and you can pay less than the 15% long term capital gains on all of your dividends or income.

We did an analysis just recently, and a client had $60,000 of dividends, $30,000 of IRA distributions, and $45,000 of Social Security benefits, and the effective tax rate on their dividends was about 6% on that 36,000, and that’s because of the phasing, a lot of them fell into the 0% bracket and then a portion of them, I think it was about 22,000, were taxed at 15%. So the effective tax rate was about 6% on those $60,000 in dividends.

The tax code is complex. I encourage you to talk to a CPA, if you have a CPA who will do this type of forward planning. And of course, if you’re one of our clients we’re already doing this for you. And if you’re not a client yet, and you’d like to work with us and have an understanding, a retirement professional help you have an understanding of how the tax code can apply to your retirement to get you more retirement income, then feel free to go to the website, reach out to us, give us a call, and we’d be glad to work with you.

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