Is it really possible that some get $10,000/month tax-free from Capital Gains?
There is a little known tax planning strategy that some (rare) people use for tax free living…. Picture this: living on $10,000 a month, completely tax-free and not being 59 1/2 yet… Sounds like a dream, right? Well, believe it or not, some people who have large amounts invested in “taxable” accounts are doing it – it's rare, but possible for those who know how to leverage the tax code effectively with their investments.
Like we said, this is rare to see, but let’s look at how it is done by some!
One of the most underappreciated aspects of investing in a taxable account: the 0% long-term capital gains rate! Now, I know the term "long-term capital gains" might sound intimidating, but stick with me – I promise it's simpler than it sounds.
Let's break it down into bite-sized pieces, shall we?
First things first, what exactly are long-term capital gains? They are profits you make from selling certain assets (like stocks) that you've owned for more than a year. The key word here is "long-term," which means you've held onto these assets for a year at least before selling.
Now, here's where things get interesting: the IRS rewards investors who hold onto their assets for the long haul by offering a special tax rate on those gains – and for many it is 0%! That's right, you read correctly – you could potentially pay zero taxes on the money you make from your investments in a “taxable” when done right.
But how does it work? Well, lets walk you through it at a high level.
Every year, the IRS sets income amounts that determine whether you qualify for the 0% long-term capital gains rate. For the year 2024, the magic number is $94,050 of taxable income for a married couple filing jointly. This means that if your total taxable income (including any other sources of income you might have) – falls below this threshold, you could enjoy the 0% tax rate on your long-term capital gains.
But wait, there's more! Remember that standard deduction you get on your taxes? For married couples filing jointly, it's a generous $29,200 for the year 2024. And the best part? You can add this deduction on top of the income threshold, potentially increasing the amount of tax-free income you can enjoy.
Let's crunch some numbers, shall we? If we add the standard deduction to the income threshold for 2024, we get a total of over $123,000. That's the amount of taxable income a married couple could have before they have to pay taxes on their long-term capital gains.
Breaking it down monthly, that's over $10,000 – tax-free!
But hold on, it gets even better. If all your income comes from long-term capital gains or qualified dividends – (which are dividends paid by certain stocks that also qualify for the same tax treatment) – and it's less than $10,270 per month, you won't owe federal income taxes on that money. It's like hitting the jackpot, but without the hefty tax bill.
Using the taxable non-retirement account is an underutilized tool by many when it fits into the overall plan!
Disclosures:
Remember, this is for just here to provide guidance and education – I'm not a tax advisor. Before making any major financial decisions, be sure to consult with a qualified professional who can help you navigate the complexities of the tax code and create a personalized plan that's tailored to your unique financial situation.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. AI (artificial Intelligence) sourced articles may be prone to error, due to the vast information they assemble from the internet.
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There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All examples are hypothetical and are for illustrative purposes. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.