Are you retired but haven’t started drawing your pensions and Social Security benefits yet?

If this sounds like you, then you may have very little taxable income. There is a little-known planning opportunity for such situations. How would you like to tap into your nest egg with little to no income tax? For 2015, taxpayers who fall within the 10 or 15% marginal income tax bracket for federal income tax purposes are eligible for 0% (yes, 0%) capital gains tax! As long as you’ve held the security for longer than a year, this special 0% tax rate applies. Wait, what? Really? Yup.

Let’s look at an example:

Bob and Cindy Jones just retired. They decided to hold off on collecting their Social Security benefits for a year, but they anticipate needing $80,000 for their living expenses. Their financial advisor, let’s call her Kris, identifies a couple of highly appreciated stocks in their after-tax brokerage account that they could sell to provide them with the $80,000 they need. The sales create a realized long-term capital gain of $65,000 which is reported to Bob and Cindy at the end of the year on IRS Form 1099-B. When Bob and Cindy file their tax return for 2015, here’s what the numbers look like:

Taxable Interest = $2,300

Dividends = $3,700 ($2,500 are qualified)

Long-Term Capital Gains (from sale of the securities) = $65,000

Adjusted Gross Income = $71,000

Itemized Deductions = ($17,000)

Personal Exemptions = ($8,000)

Taxable Income = $47,000

For 2015, Bob and Cindy’s Taxable Income of $47,000 puts them in the 15% marginal tax bracket for married couples filing jointly (MFJ). Bob and Cindy would normally have a tax bill of about $6,200.

But wait - $67,500 of Bob and Cindy’s income is from long-term capital gains and qualified dividends.   Those dollars are taxed at 0%!

Bob and Cindy would only pay income tax on $3,500 of interest income and non-qualified dividends.

This is just one example of how the 0% capital gains tax can come into play. If you are wondering whether you’re missing out on these sorts of planning opportunities, give us a call.

Kristine d’Esterhazy is a Certified Financial Planner® practitioner with PARAGON Wealth Strategies, LLC in Jacksonville, Florida.

The example provided is hypothetical and circumstances may not work out for the reader in the same manner as in this example.  This technique is available due to current tax law, which may change at any time.  Individuals are encouraged to seek advice from their own tax professional and/or financial advisor.

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093 www.WealthGuards.com

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