The IRS just announced inflation adjustments for the tax year 2025.
2 quick changes:
- Standard deduction
For single taxpayers, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024.
For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024.
- Capital Gains Rate
For single taxpayers, long-term capital gains are taxed at 0% if the taxable income is $48,350 or less ($96,700 for married couples filing jointly).
Note: This bracket is based on taxable income.
Tax planning with capital gains
Utilizing the 0% long-term capital gains rate is a great way to lower your future taxes. For an investment to qualify as long-term, you must hold it for more than a year.
For example, say you are single, did fairly well financially in your early years, and decided to retire at 50. You paid off your home and need just $65,000 per year to live on. You sell $65,000 worth of stocks.
Here’s how your tax return would look:
$60,000 of long-term capital gains (assuming a $5,000 cost basis for your original investment)
$15,000 standard deduction
= $45,000 taxable income
Since the taxable income is below $48,350, all of this income will be taxed at 0% (assuming no other income sources).
So, utilizing the 0% tax rate on capital gains could be a great strategy to sustain your early retirement until age 59 ½, when you can start utilizing other sources (e.g IRA/401k) or even during lower income years.
Additionally, these brackets are adjusted for inflation each year, so if you need $62,000 due to inflation next year, it will likely match the new brackets.
However, this is susceptible to tax law changes. For example, the Tax Cuts and Jobs Act of 2017 is set to expire with the 2026 tax year, which likely means that the standard deduction amounts will change and might decrease.
Additional opportunities to lower future tax
A good friend of mine is going back to school to get his MBA. He did very well financially, so he will live off savings with no income.
This is a perfect opportunity for him to sell stocks in his brokerage account, pay $0 in taxes, and immediately buy back the exact same stocks.
Why?
Say you bought Apple stock 20 years ago for $5 per share. Now, the stock is worth $225 per share. If you sell 100 Apple shares, you will have ($225 – $5) * 100 = $22,000 in capital gains.
Now, my friend will pay $0 in taxes on these gains and will buy back those same Apple shares for $225 per share.
What this allows him to do is increase the cost basis on those shares from $5 per share to $225 per share, so the next time he sells, his cost basis is much higher.
This only works if you qualify for the 0% long-term capital gains rate on that initial sale.
So, any time you have a low-income year or take extended time off from work, it could be a good time to analyze your portfolio.
Additional consideration
State Tax – It’s important to take state taxes into consideration. For example, that $22,000 of capital gains will cost $1,100 in state taxes (assuming a 5% tax rate). You may even lose more by not being able to invest the state tax than you save by avoiding federal tax. That $1,100 could grow to exceed the $2,000–$4,000 you would owe in state tax if you sold many years later.
However, some states have no tax on capital gains. For example, Texas and Florida are among the states with no capital gains tax.
Increased Income – Sometimes a higher income can reduce available itemized deductions (e.g., medical expense deductions are based on AGI) or impact other credits (i.e the Retirement Savings Credit). It’s important to analyze the full impact based on your unique situation.
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