Understanding the 2025 0% Capital Gains Proposal for Retirees
Freddie: Hi, I am Freddie Bell, and the proposed 0% capital gains rate for 2025 could dramatically affect retirees who rely on investment income. Is that you understanding who qualifies, what thresholds apply, and how it impacts social security and Medicare is key to preparing for possible changes.
Leibel hello and welcome back. Hey, how are you doing? I'm doing well and I'm wondering, can you clarify this for me? The 0% capital gains proposal, what does that really mean
For retirees?
Leibel: Yeah so something that few people, really few people talk about and few people even know exists, but there is a 0% tax bracket when it comes to capital gains. The truth is, is there is a 0% tax bracket for income, but most people are familiar with that, right?
You got your standard deduction. What you have with capital gains. Capital gains is taxed at a different tax bracket than your ordinary income. It has its own tax system, so to speak, than your ordinary, your regular 10 40 tax return. And that is something that, you really need to take advantage of when you're retired and you really need to try to focus on.
Is it something that you're gonna capitalize on? How are you gonna capitalize on it? And there's a few moving pieces and because there's a few moving pieces and it's one of those things that's very difficult to properly articulate, it's not something you hear the media talking about. It's not something that most financial advisors talk about.
'cause it doesn't make a pithy headline. It doesn't make an easy webinar for me to tell you, I got this amazing product to sell you. No, there, there's no amazing product to sell you. There's just hard work and doing, putting yourself in the right position to be able to take advantage of it. So with that said, what that disclaimer said, let's talk about what that 0%, uh, capital gains tax bracket is and kind of what the big, beautiful bill, you know, how that impacts it.
When we talk about capital gains, we get taxed on it in in two ways. There's two things that affect it. So with income, we get taxed by how much money we make with capital gains is a combination of how much money we make, plus how much gains have we harvested or have we incurred in our trades. And so we net out our gains and our losses get netted out.
Our long term and our short term get netted out in a. Weird order and then what we're left with gets thrown onto our tax return and we get taxed sometimes as ordinary income. Sometimes as capital gains, in which case it goes at a zero, 15, 20% tax rate. And then if we make too much money, we get something called a Medicare, surcharge, which is a three and a half percent tax on top of that.
That we have to now pay more money on top of it. So when we're talking about investments and we're talking about gains and losses, 'cause that's how you get capital gains. Capital gains are, I bought something and I sold it at a higher price. So I made a profit. And when I make a profit on my trades, then I have to pay taxes on it.
Right? 'cause Uncle Sam gets a piece of everything, right? However. As we talk about a lot on, on this show, the tax code is specifically designed to move money around our economy, right? And where is the biggest concentration of money that can be moved into our economy that will. Create economic output that will hire people and create jobs, create a financial future, right?
Is the thing that everybody tries to sell products to us for, right? Because we have this great economic engine. Well, that the center of that economic engine is the stock market, right? It is investing in companies that are trying to build something new and trying to create widgets and whatever it is that we, that other people will buy and spend.
When we talk about incentivizing investments, one of the ways that the federal government incentivize investments is by creating this economic opportunity where you don't have to pay taxes on the growth of those investments. And there's a number of ways that they do that. Two of the easy, easier to access ways are, number one, if you earn below a threshold and depending on whether you're single or married, it's a different threshold.
But if you're married, it's about $44,000. So if your taxable income is under $44,000, then you do not pay any gains on your capital gains, right? So for those years where you're under $44,000, approximately 44,000, it's adjusted for inflation. You will. You will pay 0% on those gains. So you can have up to $44,000 of gains, right?
Plus your $30,000 of standard deduction, or 30, you know, 33,000, right. Of standard deduction of capital gains. And you don't pay anything in taxes, which is awesome, right? However, right. It is something that you gotta make sure to, to manage, right? 'cause it's based on your income.
Freddie: Man. So the thresholds are 44 and under.
So what's the other way? What happens after you go over $44,000?
Leibel: I'm gonna preface this by saying, right, these brackets adjust every single, single year with inflation. Mm-hmm. So for 2025, the brackets are for single filers 48,350. For married it's, 96,700.
For the long-term capital gains. And then it increases, the next bracket goes up to $533,000 for single filers and 600,000 for joint. And that is different than it was before, right? Before it was a much smaller number for the first, for the 0% tax bracket. So we get a temporary bump up.
It does eventually come back down. Um, but that is part of the great big beautiful bill is that it made that 0% tax bracket a little more accessible for a short period of time. So you need to. Again, tax planning opportunities for 2025 where you, if you've got gains, you want to try to take advantage of them, but in general you want to take advantage of them.
Um, and you wanna harvest losses because that's another way to get into that 0% tax bracket, right, is if you've got losses, they will offset your gains, right? So you can create your own 0% tax bracket, or you can stretch out that 0% for further.
Freddie: Can you talk further about who's going to qualify and who would even be interested in the 0% tax gains?
Leibel: Yeah, so, anyone who has investible assets that are not in a retirement account. So if you have investments and they are not held inside a retirement account, so either traditional IRA or a 401k, or a Roth, then you are somebody who this should perk up your ears because you are paying taxes.
On every penny that you earn in there. So if you have money that is invested, you know, in a mutual fund inside of your brokerage account, right? Or your Vanguard account or wherever that is, that mutual fund sends you a 10 99. And on that 10 99, there's gonna be capital gains and there's gonna be ordinary income.
So one thing you will definitely wanna do is get rid of that mutual fund and convert it to an ETF if you can. 'cause ETFs don't throw off 10 90 nines, you just have capital gains when you sell it. So when you go to sell that thing. You are going to have to pay taxes on that growth. And that is something that you want to avoid at all costs.
'cause we don't like paying taxes. That's
Freddie: right. So that gives us a picture of who qualifies. And I'm wondering, can you tell us if it affects social security just celebrating its 90th year? Uh, does it affect that taxation and Medicare premiums as well?
Leibel: It does. So. Oh, really? Social security. Yeah, social security is very interesting.
So social security, um, gets taxed into two, two brackets. So just like we talk about, income tax has its own tax brackets. Investment income has its own tax brackets. Well, social Security has got its own tax brackets. Um, and that social security tax brackets go into 50% and 85%. If you earn, uh, if your social security payments plus your interest payments, plus your investment gains and some other stuff get thrown in there even though you may not pay taxes on those, but at those gains, if you have gains that go into those buckets, that will move you, those get added up together.
And if they are greater than the threshold, which is you, I think it's like 22,000 22 to. 30 something thousand and can look it up. It's constantly changing. But you Google it on Social Security Administration's website and what that will push you up from the 50% bracket to the 85% bracket. And what that means is 50% of your Social security income gets taxed, or 85% of your Social security income gets taxed, and that gets added back in on your tax return as taxable income.
Although you may be in the 0% tax bracket for capital gains, you do want to question whether that's gonna cause you to pay more taxes on your social security. So that is definitely a consideration. Um, what I will also say is a consideration when it comes to this is you really gotta ask yourself the question, right?
Of what is gonna save you more in taxes, paying that taxes on in being the 0% tax bracket for capital gains or. Social security, right? The having 15% more of 35% more of your social security getting taxable, will that actually move the needle and how much taxes you're paying, because that also goes back to, you know, while it gets added into your tax return.
Depending on your standard deductions, depending on what exclusions you have, that may reduce. How much taxes you actually pay. So again, we get into this calculus game of, which will net you more in tax savings. Right. Harvesting capital gains or controlling your taxable income.
Right? And often it's a combination of the two. What I'll also throw in there, another monkey to throw in there, another wrench to throw into the gears is if you harvest enough losses, so forget about gains for a second. If you hard harvest enough losses, you can offset up to 3%, uh, sorry, $3,000 of ordinary income on your tax return.
So not only, uh, forget about social security, but it can also reduce your ordinary income tax on your tax return. So again, capital gains harvesting. We've got podcasts on it, we've got resources on the website and talk about it quite a bit. These go into those tax strategies that you really gotta consider when you're thinking about how do I pay the least amount of taxes possible?
Freddie: As mentioned, uh, there's [email protected]. That's yields the number four, the letter u.com. We just have a few minutes left, but can you, uh, tell us about the impact on the Medicare premiums and what steps retirees should be taking right now to prepare, uh, should it become law?
Leibel: Yeah, so the Medicare premiums and the Medicare premiums and Medicare surcharges.
So those are based on the last two years of your income. But again, it's, it's a modified adjusted gross income. It uses its own formula for what gets counted in there. And it uses a different set of brackets again, than anything else on your tax return. So some people like to control their taxable income and if you're close to the bracket, then you definitely should control it so that you stay under the bracket so you don't have to pay Irma and those Medicare surcharges.
But that is something, again, one of those considerations that come into play of how much money you're paying and in. In total outflows, right? You are the CFO for your household. And so you need to look at all the money that's coming in and all the money that's going out and figure out, you know, what is going to net me the most amount of money in my pocket for this quarter, for this year, right?
Short-term planning, but then you gotta do long-term planning. What's gonna net me the most amount of money? Over the long run, what will give me the greatest financial security in the long run? And what is the thing that is then, you know, beyond my life, right? For my spouse, my loved ones, and the people who I care about the most, right?
What is gonna get them have the biggest impact on them? And that's really what all these decisions come down to. In terms of, you know, things potentially coming into law, it's, you know, I really don't like preempting things unless there's a certainty that they're gonna get passed because politicians love talking, right?
That their job is to talk and their job is to get reelected, right? And oftentimes it's not about the things that they actually pass, but the things that get the most ear time. And so when you look at what actually gets passed versus what gets talked about a lot more gets. Talked about and then what actually gets passed and when it gets passed, it's never what anyone thought it was gonna be.
A few of the politicians even read the bills that get passed, so you know what? Let's an
Freddie: indictment.
Leibel: Yeah, exactly. Let's see what actually happens and where the dice fall out and. You gotta also look at like, okay, even when things get passed, what gets implemented, right?
Because remember, you got these, you got these agencies with, you know, tens of thousands of employees, ancient systems. For them to make any kind of change is not easy, and they may decide to implement the law. Very differently than what was intended. And it happens frequently to the point that, there are usually major lawsuits over any kind of major regulation because they implement it differently than Congress intended, and then people wanna litigate it.
Freddie: That's Leibel Leibel sternbach, and we've been talking about 0%, uh, capital gains. And from the conversation, I hope you've realized that 0% capital gains proposals could save retirees a significant amount of money, but only if. They qualify and if you plan carefully. So understanding the thresholds and ripple effects on social security and Medicare is absolutely crucial.
Careful preparation now can help, uh, you, the retirees make the most of potential changes. And again, you can find all of this [email protected]. He's Leibel Sternbach. I'm Freddie Bell, and this is Leibel on Fire.
