The secret to getting into the 0% tax bracket
If you’re tired of giving away the majority of your income to taxes, there’s a way around that. You can legally decrease or completely eliminate your tax bill by taking advantage of some of the perks in the tax code.
So, when you’re ready to tap into the secret sauce to enjoy more of your money and unlock the 0% tax bracket, here are some tips to make the process a breeze.
Take advantage of the best deductions
Tax deductions are powerful components of a tax return, allowing you to trim your tax bill and keep more money in your pockets. There are some incredible benefits available that allow you to earn up to a certain amount of gross income before you have to share a piece of your income with the IRS.
For example, there’s the standard deduction that’s given to eligible taxpayers who don’t itemize deductions. In 2021, a married couple filing jointly can make up to $25,100 before they have to start paying taxes. Essentially, the standard deduction shows you how much tax-free income you can earn every year based on your filing status.
Then, you have retirement account benefits. If you’re under 50, you can elect a voluntary deferral of income up to $19,500 by contributing to an employer-sponsored plan like a 401(k). You may also be eligible to receive an additional tax break for contributing to a Traditional IRA (individual retirement account).
Don’t sell winning investments so fast
Being an investor comes with another level of benefits that you probably weren’t privy to if you only receive earned income. But this also requires a bit of strategy to reduce your taxes. For many, it’s tempting to buy stocks and sell them as soon as the price shoots up. But if you hold on to your investments for a little bit longer — over a year — you’ll be eligible for the coveted long-term capital gains tax rates of 0%, 15%, or 20%.
Simply put, it pays to be patient in the stock market. If you sell a stock that you’ve owned for a year or less, you’ll have to pay a short-term capital gains tax, which can be as high as 37%. Once you’ve held an investment over the one-year mark, you’ve hit the long-term capital gains threshold. This is when the benefits really start pouring in.
You will fall into the 0% tax bracket if you’re a single filer with taxable income under $40,401. But if you’re married, you get double the perks. Married filers with income under $80,801 get to claim the 0% tax bracket for long-term capital gains.
Earn more qualified dividends
If you’re not ready to sell your stocks just yet, there’s another way to get those same rates you would get for long-term capital gains. Another incredible opportunity comes in the form of qualified dividends.
These dividends allow you to bypass the higher tax rates that are associated with ordinary dividends, such as those earned from real estate investment trusts (REITs) and master limited partnerships (MLPs).
In a nutshell, qualified dividends give you exclusive access to the 0%, 15%, and 20% tax brackets if you check the box on the following three rules:
- The dividend must have been paid by a U.S. corporation or a qualifying foreign company.
- The dividends must be deemed as qualified in the eyes of the IRS and cannot be listed as a non-qualified dividend.
- You’ve held the stock paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Choose your best strategy
Finally, even if you end up owing some tax, don’t forget about tax credits. The Earned Income Tax Credit is a lucrative credit that can lead to a refund during tax time. Then, if you contribute to a qualified retirement savings account, you may be eligible for a tax credit that can wipe out your entire tax bill.
Getting into the 0% tax bracket may be easier than you think. All it takes is a smart strategy that allows you to combine tax credits and deductions, accumulate more long-term capital gains, or benefit from qualified dividends. Soon, you’ll be on your way to keeping more money in your pockets and funding your dream life with all the tax benefits you find in the code.