Last episode we talked about how $1 of additional income could cost you tens of thousands of dollars. This week I want to go the other way. I want to tell you how you can add income to your return and really have no additional federal tax.

You may have additional state tax, but no additional federal tax. I like to call it the 0% tax bracket. Most people like 0% and with the standard deduction being for 2019 is $24,400 and if you’re over 65, it ends up being $27,000 for married couples. What happens is if all of your income comes from social security and maybe some IRAs, your taxable income may be below the $24-$27,000 so essentially your taxable income is less than zero. If your taxable income is less than zero, you could have actually taken out more money from your IRA and it wouldn’t have cost you any tax.

What we’re trying to do with our clients is even if you don’t need it, maybe this is a good year to take some extra money out of your IRA and put it into maybe investments or savings. It costs you 0% tax. Who knows if you have to take that same amount out the year after, it may cause you some tax. So take it while the getting is good.

So are there other ways to pay zero tax on additional income?

There is – so if you have long term capital gain distributions, long term capital gains from, for example, the sale of stock, or if you have qualified dividends, there is an income tax bracket where all of that type of investment income is taxed at 0% for federal. Your taxable income has to be below $78,950 so let’s say somewhere around $79,000. If your income is below that amount and you have capital gains, long term capital gain distributions, qualified dividends, the amount of income that’s in that particular bracket under $80,000 – $79,000 will be taxed at 0%. So if you think you may be in that category you may want to talk to your CPA because there’s a lot of things that can be done.

How does this apply also to state, or is this just federal?

This is just federal. You’re probably going to have some state tax that you have to pay. But normally state tax, especially for Wisconsin, for a long term capital gains is somewhere around 4%. So it’s not that bad. Let’s say you have some capital gains that you want to take but you’re not sure if you should. This may be an opportunity to be able to take those if you’re going to pay just 4% for state tax and 0% for federal. It may be a good time to take some capital gains even if you like the stock.

It’s kind of funny because if you have room within this bracket at 0% you can sell that stock, pay zero capital gains, and buy the stock back the next day. That essentially gives you free basis so that when you sell it later, your gain is less and you pay less tax down the road. So there’s a lot of things that you can do with this, what I call 0% tax bracket.

This is why it’s important to work with the tax professionals such as yourself over at Hawkins Ash CPAs.

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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