By Gretchen Ross, CRTP

This year, I’ve been seeing a lot of clients who have managed to generate plenty of investment income and yet at the same time have a very low federal tax liability.  How do they do it?  They are taking advantage of the favorable capital gains tax rates.
Taxpayers with taxable income up to $73,800 for a married couple filing jointly or $36,900 for a single person pay ZERO tax on any long term capital gains.  Long term capital gains are the profits from an asset that is held for over one year.  Also included in this favorable tax rate are qualified dividends.  And remember, taxable income is after your deductions and exemptions, so your actual income could be a lot higher.
This could change your investment strategy if you are retired or semiretired.
As an example, you may want to hold stocks or mutual funds that generate qualified dividends and gains outside of your retirement plan and assets that generate more ordinary income inside of your plan.  Perhaps you might consider getting out of tax-free municipal bonds and into blue chip stocks with a track record of qualified dividend increases.  Keep in mind, California does not distinguish any difference in tax rates–so capital gains are taxed as ordinary income.
One other area this impacts is in the sale of real estate other than your principal residence.  Let’s say you own a vacant lot with a gain of $120,000.  You might consider structuring that transaction to receive payments over two years rather than one or finance the sale of a rental property on an installment contract.
This strategy is not for the faint-hearted.  Determining your taxable income is a complex interplay between ordinary income, investment income, capital gains, and Social Security, but it is worth the effort.  Remember, there is no tax savings that makes up for a bad investment decision, so please get financial planning advice as well.  Be sure to bring your tax returns to your financial planner and then to discuss your strategies with your tax preparer.

Gretchen Ross has been preparing taxes since the 1993 tax season.  She and her husband, Mike Foster, CPA, run Central Coast Tax Professionals in Morro Bay.  Together, they provide personalized attention to their clients.  They have over 50 years of combined experience in helping people prosper.  Gretchen has her BA in International Studies, has run various businesses and has been involved in many aspects of real estate from development to management.  You can read past articles on her blog at www.cctaxpros.wordpress.com