0% Long Term Capital Gains Explained
Frank wrote in:
“I have a question from Episode 471 with Cody Garrett. Cody talked about the three tax rates on long-term capital gains (0%, 15%, 20%).
As I understood the conversation, if you have long-term capital gains of LESS than $94,050, you pay NO TAX on that amount.
However, let’s say you have taken long-term capital gains of $100,000 over the course of one tax-year. Is the tax 15% on the entire $100,000 since you’re over $94,050, or, do you pay a 15% tax on just the amount that is greater than $94,050? For example……the first $94,050 of my capital gains are taxed 0%, and the difference ($5,950) is taxed at 15%.”
Cody responded:
Ordinary income and long-term capital gains are taxed using a progressive bracket system. A portion is taxed at 0%, then the next at 15%, etc.
With long-term capital gains (LTCG) of $100,000 as your only form of income (married filing jointly under age 65 in 2024):
The LTCG tax rates are based on Taxable Income, after Adjusted Gross Income (AGI) has been reduced by the standard/itemized and QBI deductions (if applicable).
Taxable Income would be $100,000 – $29,200 standard deduction = $70,800.
No federal income taxes are owed since the entire $70,800 falls within the 0% LTCG bracket.
Let’s use another example with higher income: LTCG of $150,000 instead of $100,000
Taxable Income would be $150,000 – $29,200 standard deduction = $120,800.
The first $94,050 would be taxed at 0% ($0), and the remaining $26,750 would be taxed at 15% ($4,013). The effective (average) tax rate is 2.7% ($4,013 / $150,000) although the highest LTCG tax rate was 15%.
For more information about tax planning, here is a walkthrough of a 2023 federal tax return.
Live Podcast Recording in NYC
Paula Pant is nearing her 500th episode of the Afford Anything podcast and to celebrate she’s hosting a LIVE podcast recording in Brooklyn on Tuesday March 26th.
I was honored that she invited me to join her in recording this very special episode and I can’t wait to experience the energy of recording this live in front of an audience of FI Community members.
All the details are listed out here on the Eventbrite page and we’d love for you to join us!
It’s going to be held in a comedy club in Williamsburg, Brooklyn and each of the two recording sessions are limited to only 60 people, so the tickets are going to go fast.
The Good Old Days Are Happening Right Now
“An important reminder: Every single thing you do today is something that your 90-year-old self would wish they could go back and do.
The good old days are happening right now.”
Sahil Bloom on Twitter
ChooseFI Community Taking Action This Week
“My 1% better was setting up allotments through my work. Now my pay goes directly into the accounts I need them to go into and it looks like I have no money in my personal checking account. I had no idea the power this change would have on me. Everything seems so much more manageable now. I can see a path forward on paying off debt, needed repairs around my home, regular investments outside my 401(k), and living a bit in the now with my young children. I am also studying for certifications that may allow me to increase my pay by 46% by using work-funded training programs.”
– Nikki
“I’m happy to say I have been diligently working to make my life 1% better every day, but this entry goes to the fact that I successfully convinced three people in my circle to open an IRA and invest in low-cost index funds. On top of that, one of those three people were swayed into the FIRE movement after I bought him a copy of Your Money or Your Life, which was the book that opened my eyes to the possibility of FI. Thank you for your work in FIRE evangelism, bringing this community of amazing people together, and for being a genuinely good person.”
– Tim
“My 1% better is that I have finally gotten my parents to take action and it has paid off! They have been using a financial advisor that has been charging them 2% for ten years. I have been trying to get them to break up, but when that didn’t work I had chatGPT write an email to the advisor to ask for a fee reduction. And boom, his fee is down to 1%. Next step is to get my parent to break up with him. Baby steps.”
– Lilach
“My 1% better was designating my wife as a beneficiary for my savings account. Amy’s episode 476 made me realize that even though I have a will, not designating my wife as a beneficiary could cause her unnecessary hassle if something happened to me.”
– Patrick
“My 1% was listening to Ep. 476 and checking beneficiary designations on ALL of my accounts. I did catch one that needed an update. That was a great episode, albeit difficult.”
– Ryan
“I must thank the FI Tax Guy for my 1% better last month. My family is on the single-income path to FI and as a result of a job change last year, our income taxes increased substantially. This is a good problem to have, but it still stings because we only have my 401k available, no HSA, and I am income-ineligible for a deductible IRA. Recently the FI Tax Guy released a post titled The Spousal IRA that made me aware that even though I am income-ineligible for a deductible IRA, my non-working spouse was still eligible for a deductible IRA. The post also provides links to learn more about the phase-outs. We were able to recharacterize all of my wife’s 2023 spousal Roth IRA contributions to traditional through the Vanguard website and reduce our income taxes.”
– Matt
