Can Your Clients Avoid Capital Gains Tax?
Good to Know
Yes—even clients with a 6-figure income can pay no tax on long-term capital gains. Sound too good to be true? Read on to see how many of your current clients qualify.
Long-Term Capital Gain (LTCG) Rates
We tend to assume that clients with LTCG and an above-average income will pay at least 15% in LTCG tax. We’ll challenge that all-too-common assumption in a moment but first, know that LTCG tax rates are determined by filing status and taxable income, as exemplified in the chart below.
| Rate | Taxable Income (excluding LTCG) |
| 0% | $0 to $83,350 |
| 15% | $83,351 to $517,200 |
| 20% | >$517,200 |
The impact on a hypothetical retired couple follows.
Retired Couple
Jack and Jill, both aged 71 in 2022, retired at age 70.1 Information for 2022 follows:
- No compensation income,
- Filed “Married Filing Jointly,”
- Net LTCG of $20,000, and
- Income per the chart below.
| Source | Amount |
| Municipal Bond Interest | $15,000 |
| Roth IRA Distributions | $ 5,000 |
| Taxable Distributions from 401(k) Plan | $15,000 |
| Taxable Distributions from Pension Plan | $ 25,000 |
| Social Security Retirement Benefits1 | $65,000 |
| Net Long-Term Capital Gains | $ 20,000 |
| Total Income | $145,000 |
They will pay no LTCG tax despite having a total income of $145,000. Their taxable income (before LTCG) of $53,5752 puts them in the 0% rate bracket. Interestingly, retired clients are not the only ones eligible for that lovely 0% LTCG rate.
Early-Career Clients
Marc and Cleo are 25 years of age. Financial information for 2022 includes:
- Filed “Married Filing Jointly,”
- Compensation of $55,000 each,3
- Deferred 5% of their pre-tax compensation into their 401(k) plans, and
- Net LTCG of $20,000.
Even though their total income, including LTCG, was $130,000, they will pay no long-term capital gains tax. Their taxable income (excluding LTCG) of $78,6004 qualifies them for the 0% LTCG rate bracket.
Conclusion
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We’d be remiss not to put one last idea on your radar—your mid-to-late career clients with higher incomes could score a 0% LTCG tax rate when their annual income is lower than normal from causes such as large itemized deductions or, if a business owner, deductible business losses.
In conclusion, coaching your clients on when to take long-term capital gains is primarily an investment management decision, but tax cost is a crucial factor.
1 They delayed claiming SS Retirement benefits from normal retirement age until 70 to gain a 28%/month benefit increase (they have longer-than-average life expectancies).
2 Muni bond interest & Roth IRA distributions are income-tax-free, about of the SS benefit is excludable from taxable income (IRS rules), & they took the standard deduction.
3 National median income = $55,000 for workers aged 25-34
4Reflects 401(k) deferrals & the standard deduction
Disclaimer
The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide financial advice of any kind—including but not limited to legal, identity theft protection, investment, income tax, risk management, retirement, or estate advice. Consult an experienced, credentialed expert for detailed guidance.
