Find Out if You Qualify for the 0% Tax Rate for Capital Gains and Dividends

Many people currently qualify for a 0% federal income tax rate on net long-term capital gains (LTCGs) and qualified dividends earned in their taxable accounts. Investment assets that may qualify include marketable securities and real estate held outside of tax-favored retirement accounts. Here’s how you might be able to take advantage of this favorable rate — even if your income is too high to qualify for it yourself.

Federal Tax Brackets for LTCGs and Dividends

Your federal income tax bracket for net LTCGs and qualified dividends is determined by your taxable income, including any capital gains and dividends. Taxable income equals your adjusted gross income minus either:

• Your standard deduction, if you don’t itemize, or
• Your total itemized deductions, if you itemize.

Here are the 2024 federal rate brackets for net LTCGs and qualified dividends, based on taxable income:

LTCG tax rate           Single                           Married filing jointly                 Head of household

0%                            $0–$47,025                            $0–$94,050                                  $0–$63,000

15%                          $47,026–$518,900                 $94,051–$583,750                       $63,001–$583,750

20%                          $518,901 and up                     $583,751 and up                          $583,751 and up

Important: Assuming the current tax rules remain in place for 2025, these brackets will be adjusted for inflation next year.

Who Can Benefit from the 0% Rate?

The 0% tax rate applies only to net LTCGs and dividends that fall within the applicable brackets. However, you can earn a healthy income and still qualify for this favorable rate.

For example, Brittany and Brian are married and file jointly. They have two dependent kids and will claim the standard deduction of $29,200 for 2024. This year, they could have up to $123,250 of adjusted gross income, including LTCGs and dividends, and still be within the 0% rate bracket. Their taxable income would be $94,050 ($123,250 minus $29,200), which is the top of the 0% bracket for joint filers.

Likewise, Steven is single and has no kids. He will claim the standard deduction of $14,600 for 2024. He could have up to $61,625 of adjusted gross income, including LTCGs and dividends, and still be within the 0% rate bracket. His taxable income would be $47,025 ($61,625 minus $14,600), which is the top of the 0% bracket for single taxpayers.

If single or married taxpayers itemize deductions, their adjusted gross income, including LTCGs and dividends, could be even higher, and their taxable income would still be within the 0% bracket.

Important: The adjusted gross income figures cited above are after subtracting any allowable above-the-line write-offs. Among others, these write-offs include:

• Deductible IRA contributions,
• Health savings account contributions,
• Self-employed retirement plan contributions,
• Self-employed health insurance premiums, and
• Alimony payments required by pre-2019 divorce agreements.

So, if an individual has above-the-line deductions, his or her adjusted gross income could be that much higher and still be within the 0% bracket for net LTCGs and qualified dividends.

Set Up Loved Ones to Benefit from the 0% Rate

If your income is too high to benefit from the 0% rate, you may have loved ones with lower income who could benefit from it. If so, a generous, tax-smart move would be to give them some appreciated investments. Then they can then sell them and pay 0% on the resulting gains — assuming the assets have been held for over a year. (The holding period includes your holding period before the gift and the gift recipient’s holding period after the gift.)

Giving away stock that pays dividends is another tax-smart option. If the dividends fall within the gift recipient’s 0% rate bracket, they’ll be free from federal income tax.

Important: Keep in mind that the “kiddie” tax can result in a portion of an affected child’s or young adult’s unearned income being taxed at the parent’s marginal federal income rate. This tax hits individuals who are up to 23 years old if they’re students.

Federal Gift and Estate Tax Consequences

Under the annual federal gift tax exclusion privilege, you can give away assets worth up to $18,000 to each gift recipient in 2024 without any adverse federal gift or estate tax consequences. Such gifts won’t reduce your unified federal gift and estate tax exemption ($13.61 million for 2024).

A married couple can jointly give away up to $36,000 ($18,000 times two) without any adverse federal gift or estate tax consequences. If you use part of your unified gift and estate tax exemption, you can give away more.

Possibly a Limited Time Offer

Don’t assume that the 0% rate on net LTCGs and qualified dividends will last forever. Congress could potentially target this tax break in future legislation to generate additional revenue to fund federal spending programs. Your tax advisor can help you plan how to take advantage of the 0% rate, whether it’s for you or for a loved one.

Copyright 2024

This article appeared in Walz Group’s June 10, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.