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Income taxes are never simple and the capital gain taxes are no different. Learn how to understand the new capital gain tax rates.

To learn more about the new capital gain tax rates, click here. 

Transcription

Did you know that there is a zero percent capital gains rate? Well, I’m going to tell you how to pay zero taxes on your capital gains.

But first, what is a capital gain?

Well, that is when you have an asset outside of retirement, like a stock, a mutual fund, an index fund. Even a piece of real estate. You own it for a year. You sell it at a gain. You pay a special capital gains tax rate.

It’s cheaper than the regular tax rate. It’s normally 15% for most people. And 20%, if your income is high enough.

There is also a 3% Medicare Surtax at certain income levels. But most of you will pay 15% on your capital gain taxes.

But what about 0%? That’s the better rate, right? So, let’s talk about how to pay 0% taxes on your capital gains.

The first way to do it is if your income is low enough. So, if your married and your taxable income is below $76,000, about. Or single, below about $38,000. If you have any capital gains that make up that income, guess what? The federal government taxes you at absolutely zero. There’s no tax to pay. You may pay some for your state, but there’s nothing on federal taxes.

Now, for some of you it’s like, “Well, I make more than that. What can I do?” So there is a strategy called tax loss harvesting. And this is what I want you to think about. Some of you know about this but I’m going to tell you how to do this better.

So that is when you buy an asset, like a mutual fund or index fund and it goes down. Sometimes assets do go down before they go back up. So, when it goes down I want you to sell that asset when it’s lower. Not because you’re happy about losing money, but sell the asset.

Here is the key. Buy another asset that is similar so that you will receive the incline when it goes back up.

In the meantime, you have created a tax loss on your tax return.Let’s say you bought an asset at $20,000 then it’s $15,000. This loss here, that $5,000 loss, you can use that dollar-for-dollar against other capital gains.

And that is how you pay zero tax on that.

Now here is the thing I want you to realize. Your positions can go up and down throughout the year. Sometimes some of you look at this only in December and the market may be up at that point. Look at it year round. Anytime the market dips you want to be looking at tax loss harvesting opportunities. The best thing is you can net these losses against gains dollar-for-dollar.

If you have more losses than gains, the IRS says you can take another $3,000 against ordinary income, like salaries and pensions and so forth.

If you still have more losses, it carries over to the next year. And it carries over for the rest of your life.

So there is no downside to doing this – only upside.

Imagine this, in retirement, you’ve got this store of losses. You take money out of the non-retirement accounts.

You pay no taxes on it.

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About the Host

Alan Clopine

CEO & CFO

CPA, AIF®

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently shares the CEO role with Michael Fenison, the original founder of the company. Alan is primarily responsible for the day-to-day activities of...