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Take Advantage of 0% Rate on Investment Income

Posted by Admin Posted on May 27 2016

For 2015, the federal income tax rate on long-term capital gains and qualified dividends is still 0% when those gains and dividends fall within the 10% or 15% federal income tax rate brackets. This will be the case to the extent your taxable income (including long-term capital gains and qualified dividends) does not exceed $74,900 for married joint-filing couples ($37,450 for singles). While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in the bottom two brackets. If so, consider giving them some appreciated stock or mutual fund shares which they can then sell and pay 0% tax on the resulting long-term gains. Gains will be long-term as long as your ownership period plus the gift recipient’s ownership period (before he or she sells) equals at least a year and a day.

Giving away stocks that pay dividends may be another tax-smart idea. As long as the dividends fall within the gift recipient’s 10% or 15% rate bracket, they will be federal-income-tax-free.

Warning No. 1: If you give securities to someone who is under age 24, the Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the parent’s higher rates, instead of at the gift recipient’s lower rates. That would defeat the purpose. Please contact us if you have questions about the Kiddie Tax.

Warning No. 2: Also, be aware that if you give away assets worth over $14,000 during 2015 to an individual gift recipient, it will generally reduce your $5.43 million unified federal gift and estate tax exemption, as well as trigger the requirement of a gift tax return filing. However, you and your spouse can together give away up to $28,000, without reducing your respective exemptions.