How You Can Grab 0% Tax In Retirement

The US tax code allows for a 0% tax rate on investment income for individuals with limited income, even those with substantial assets. The 0% rate applies to capital gains and qualified dividends in taxable accounts, and individuals can strategically manage their income to qualify. However, exceeding certain income thresholds can trigger taxation on Social Security benefits and increase the overall tax burden.

0% Tax Rate on Investment Income

• 00:01:08 The US tax code offers a 0% tax rate on investment income, such as capital gains and qualified dividends, even for high-net-worth individuals. This rate has been in effect since 2008, and in 2020, approximately 11 million tax filers qualified, including about 34,000 who earned over $1 million. It's important to note that this rate only applies to taxable accounts, not tax-sheltered accounts like IRAs or Roth IRAs.

Income Limits for 0% Rate

• 00:01:53 The income limits for the 0% rate are based on adjusted gross income (AGI), not just taxable income. For single filers, the AGI limit is roughly $60,000, and for married couples filing jointly, it's around $120,000. This is after considering standard deductions and other deductions. The speaker points out a common misconception that individuals making $100,000 or more cannot qualify.

Strategies to Achieve 0% Tax Rate

• 00:03:23 Individuals can use strategies like minimizing required minimum distributions (RMDs) and strategically managing their income to maintain a low tax bracket. The speaker provides examples of retirees using this strategy by keeping their tax rate below 12% and relying on the 0% tax rate on dividends and capital gains, rather than Roth conversions.

Social Security and Capital Gains Interaction

• 00:09:08 Increasing capital gains income can cause a portion of Social Security benefits to become taxable. The speaker uses a hypothetical couple, Susie and Bob Sample, to demonstrate this. As they increase their capital gains, a larger portion of their Social Security benefits become taxable, ultimately increasing their overall tax burden. This concept is referred to as the ‘tax torpedo’ by some.

State Income Tax Considerations

• 00:07:51 State income tax rules can further impact the 0% tax rate strategy. The speaker mentions Georgia, where married couples over 65 are exempt from state income tax on the first $130,000 of income. This highlights the importance of considering state-specific tax laws when attempting to achieve a 0% tax rate.