A gain from the sale of stock is sometimes taxed differently than income from wages. Investment gains may qualify for preferential capital gains treatment. Individual tax filers who pay the lowest tax rates on regular income often pay a capital gains tax rate of zero percent.
A capital asset is a nonbusiness asset that is personally owned for investment or personal use. Corporate stock held for investment or retirement purposes is a capital asset. In order to qualify for preferential tax rates, capital assets must be held for over one year before being sold. Gains on capital assets held for more than a year are referred to as long-term capital gains.
Regular tax brackets
There is a specific line entry on Form 1040 labeled as taxable income, on which regular income tax is calculated. The lowest regular tax rate is 10 percent of taxable income, and the next lowest tax rate is 15 percent. The zero percent tax rate on capital gains applies only to tax filers who are in the lowest two tax brackets.
Thresholds for zero percent capital gains tax
For 2016, the following levels of taxable income are at the upper ceiling of the 15 percent tax bracket for the applicable filing statuses.
- Single $37,650
- Head of household $50,400
- Married filing jointly $75,300
Although there is a separate tax calculation for long-term capital gains, they are still a portion of total income reported on your tax return. The key to applying the zero percent rate to all long-term capital gains is to keep your total income, including the capital gains, beneath the applicable threshold amount.
Additional income in the form of long-term capital gains could affect other aspects of your tax return, such as the taxability of Social Security benefits. Another factor to consider is that the Earned Income Tax Credit is available only to tax filers with investment income of $3,400 or less.
The opportunity to pay a reduced tax rate on the sale of stocks arises each year. The opportunity for that year then disappears if it is not taken. Even at higher income levels, the long-term capital gain rates remain preferential but not so obviously advantageous as zero percent.
Because of the potential interaction with other areas of the tax return, eligible tax filers should plan ahead to determine when to take advantage of the zero percent rate. Contact a financial planner from a company like C & C Tax and Financial Services Inc for additional advice on the optimal timing of stock sales.