Transcription
I've done a lot of strategizing around capital gains with my retirement planning clients. The new tax bill passed in 2025, known as the One Big Beautiful Bill Act, is providing for some expanded opportunities for seniors, specifically those aged 65 and above to take long-term capital gains at a 0% capital gains tax rate. That's what we're talking about today. Let's get going.
Now, to kick this conversation off, we got to just talk first conceptually about how capital gains tax rates work. So, I'm going to throw a table up on the screen, which gives the current tax rates for tax year 2025 for long-term capital gains. And as you can see up here, the income thresholds for individuals are on the left, uh, for joint filers on the right with the tax rates in the center here. We're going to focus our discussion today, of course, on this first tax rate, which is 0%. A lot of planning opportunities around this.
Now, here's the critical thing to understand, and we're going to look at an example in a second to emphasize this point. These income thresholds are based on a phrase or a tax definition known as taxable income. So this is a net after deductions number which means if you especially if you have no other sources of income your capital gain can actually be higher again because this is a net after deductions number. Let me show you what I mean.
Now to help illustrate how the tax rate on capital gains is determined and also identify a common misunderstanding here. Let me give you a quick example. Let's say we have Bob and Bob retired at the end of 2024 and basically throughout 2025 his plan was to just live off some stock that he had accumulated over time. Now Bob being a little bit clever understands there's this 0% capital gains tax rate and I'll throw the table back up on the screen here. He's not married so he's filing as an individual. His goal is to keep his capital gains, you know, under this key threshold here so he can pay a 0% federal tax rate. But what I'm going to show you next on a sample tax return, if he only takes 48,350 bucks, he's actually going to be missing some opportunity to take more tax-free. Let me show you why. Here, I'll give you a hint. Remember this phrase here, taxable income.
So, let's jump over to a tax return. Here's just a hypothetical 2025 tax return. We'll say this is Bob. We'll say Bob's 62. Okay, we're going to scroll down here. Again, key assumption here. Capital gains are Bob's only sources of income for this year. So, here it is on line 7. 48,350 bucks. Okay, but we got to go down here and let me jump all the way to the bottom. Take a look at his taxable income figure on line 15. It's 32,600. Remember, [snorts] this is the key figure. This is what determines what your tax rate is in that tax table that I just showed you for capital gains. And his is only coming in at 32,600. Well, again, this is because taxable income is a net after deductions number. So in this example, we're assuming Bob is taking a standard deduction which brings his income down. So in other words, Bob is leaving $15,750 of tax-free capital gains on the table.
Now that we understand that the tax rate for long-term capital gains is based on that net after deductions number, that phrase known as taxable income, we can go back to our rate table and essentially gross the figures up to determine, you know, the hypothetical pre-deductions number. In other words, the maximum amount of capital gains that someone can take before deductions and still capture that long-term capital gains tax rate. So, let's do that.
Here's the tax table. And first and foremost here, we're going to deal with folks under age 65. We're going to get to those seniors and the benefits of the bonus deduction in the new tax bill in a moment. But basically, here's what we're doing. We have our thresholds. Again, these are for taxable income. We can gross these up by the standard deduction figure. And of course, it's like 90% of tax filers take a standard deduction. And if you itemize, you can adjust this for yourself. But the bottom line is in our example with Bob, Bob in theory under with one key assumption here again is that he has no other sources of income. If the only income he was going to have in 2025 was coming from a long-term capital gain, he could take up to $64,100 and again still fall in the 0% rate. I'll hop back over adjusted Bob's tax return so we can see this over here. Here's line seven. There's his capital gain 64100 64,100. There's the standard deduction he's taken bringing him perfectly to the top of that 0% tax bracket at 48,350.
Next, let me show you how the new tax bill is providing some additional deductions for folks aged 65 and up, which of course expands this opportunity. One of the most popular provisions of the new tax bill is the so-called senior bonus deduction, which comes on top of the standard deduction for folks aged 65 and above. I'll throw a slide up on the screen just to highlight a couple things here. So, the bonus deduction for single filers is $6,000 as long as your gross income is 75,000 or less. And for married filers, it's basically just double that. Each spouse gets $6,000 for a total of 12 as long as gross income is under $150,000. These bonus deductions do phase out once you break through these thresholds, but we'll leave that for another day.
Now, finally, we're going to go back to the tax tables. And if you've been following along, you can probably already see where this is going. We're going to show the expanded opportunity here because of the big beautiful bill uh for folks age 65 plus to take the maximum amount of tax-free capital gains. So here is the tax table. Again, I've made one notation up here. The red I'm going to throw up on the screen is for folks age 65 plus because people age 65 plus get a little bit larger standard deduction as well. So here are the figures. We're grossing up these income thresholds, so pre-deductions. And here's the standard deduction for individual tax filers 65 and above, plus the senior bonus deduction. You can see it over here for joint filers. Bottom line, take a look at this. Individuals 65 and above, $72,100 is the theoretical max capital gains you could take tax-free, assuming you're taking that standard deduction. And look at this for joint filers. I mean, we're approaching 150,000. Getting very close. I mean, that is an incredible opportunity for tax planning, especially if you're someone who's transitioning into retirement and you have a big block of stock. You know, if you're deferring social security, you can implement a pretty creative plan to divest of some of that stock and pay no federal income tax.
Now finally the last thing I want to mention here is the senior bonus deduction which is providing this expanded opportunity for 0% capital gains is set to expire at the end of 2028. That's how the law was written. So you do have a relatively narrow window of opportunity to take advantage of this. And thus, if you're someone who's in the fortunate enough position where you have some control over what your income is year-to-year, you're going to want to make sure you're doing your planning pretty quickly here to take advantage of the opportunity.
So, hey, thanks for watching today. If you got any questions, please drop those in the comments section. I do look at those and try to answer when I can. Thanks for watching. See you on the next one.