Have You Heard of Paying a Zero Tax (0%) Rate?
Updated: May 31
There is so much on the internet about how to pay little to no taxes for life, and from what I can see, a lot of it is garbage, with some even going so far as downright deceitful. What I’m going to focus on are a few well known strategies to potentially lower your taxes and even, in some cases, pay 0%.
To start, we need to break up taxes into two categories – 1) Ordinary income (think job), and 2) Capital Gains (think investments). So when it comes to ordinary income, how do you get a zero tax rate? You have to put your money in places that shelter it from taxes. Here’s a brief list of some of these:
- 401k (pre-tax)
- Traditional IRA
- Health Savings Account (HSA)
- Investment Losses (up to $3,000 per year)
In addition, you also get a standard deduction or itemized deduction on your taxes. If you take a standard deduction, you get to reduce your taxable income by up to $24,800 as well if you are married filing jointly. If you itemize on your taxes, there are a number of additional ways to reduce your taxable income:
- Mortgage Interest
- State and Local Taxes (property & sales)
- Charitable Gifts
On top of these things, other ways that people reduce their ordinary income taxes are through write off on investment property expenses and business expenses.
But the area I really want to focus on is looking at Capital Gains taxes. If you have an investment in a non-retirement account, that investment is most likely subject to capital gains. What does that mean? Well if you took $100,000 and invested it in a stock, business, real estate, etc., when you sell that investment in 5 years for $300,000, the $200,000 in growth hasn’t been taxed yet and the IRS will come knocking. The tax rate on capital gains, however, is different than your income. Here are the 2020 rates below:
Yes, it is true, that top row has a 0% tax rate built right into the IRS code. But how do you interpret this and access the 0% rate? To start, you have to have an investment asset that has been held for over one year. Then you have to have your total income below this number plus any deductions. For example, if you are married filing jointly and using a standard deduction of $24,800, you need your income somewhere below $104,800 ($80,000 plus $24,800).
If your income qualifies and you have those investments, you too can be in the elite status of those who pay 0% taxes – at least in capital gains. If you are considering this strategy, you should definitely have professionals in your world that can help you with the calculations, because going over the limit will cause all of the growth to be taxable and not just the part over the limit. Talking to a Financial Planner and CPA today will go a long way in helping you put a viable strategy in place.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Andrew Cremé and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.