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How to Limit or Eliminate Capital Gains Tax in Retirement

Posted by McDonald & Osborne Posted on Oct 14 2015

If you need to take money from your investment account to live on in retirement, you may be eligible for the 0% long term capital gains rate depending on your income level. In January 2013, the 0% rate on long term capital gains became permanent for tax payers in the 10% & 15% income tax brackets.

For married couples who file joint returns, you will qualify for the 0% rate as long as your taxable income is $72,500 or less (in 2013) and $36,250 for single taxpayers. Keep in mind your taxable income is your adjusted gross income less your personal exemptions (for yourself, your spouse, and dependents) and standard or itemized deductions.

If you hire an investment adviser and CPA, it is important that they communicate openly about any capital gains and other sources of income/deductions throughout the year for best results. When selling a position in a stock or mutual fund, it must have been held for an entire year to qualify as long-term. If you held the investment for 364 days and sell, you’ve incurred a short term capital gain and will be taxed at regular rates.

Also beware that the profits taken in the form of capital gains could lift you into a higher tax bracket. To pay no tax on the sale, you have to calculate the amount of gains you can take before your income exceeds the threshold.

Finally, if you receive Social Security benefits, understand that capital gains could have an effect on how much of those benefits are taxable. Typically, you will pay tax on 85% of your Social Security benefits if your provisional income is greater than $44,000(for married couples). Provisional income is your adjusted gross income plus 50% of any Social Security benefits plus any tax-free interest income (such as municipal bond interest).

As you can see, it may take some adequate planning to ensure you can qualify for the 0% capital gains rate, but it may be well worth the effort. If your income is typically higher than the thresholds previously discussed, its important to still keep the information in mind. For instance, if you run your own business and have to take losses in one year, it may present the opportunity to unload some of your capital gains holdings for free.

Stephen Osborne