Under current tax law, dividend and capital gain income for couples with income of $100,000 or less can be tax-free. The income must come from qualified dividends and long-term capital gain.

Qualified Dividends:
Although dividends can be received from both US and foreign companies, not all dividends are considered “qualified”. The IRS tracks companies whose dividends are not considered “qualified”. In addition, there is a holding period and some technical requirements that most investors meet if they have held the shares for greater than 120 days. You should consult your tax advisor for specific guidance.

Long Term Capital Gain:
In order for the capital gain from the sale of an investment to be treated as long-term, the investment must have been held for more than one year.

Here is how the tax law works:
The special tax rate is 0% for taxpayers in the 12% bracket. For 2018, the 12% bracket ends at $38,700 for individual taxpayers and $77,400 for taxpayers married filing jointly.

As an example, for a couple filing jointly with $100,000 in dividends and long-term capital gains and no other income, the federal tax is $0.

Qualified Dividends of $50,000
Plus: Long-term Capital Gain of $50,000
Less: Standard Deduction of $24,000
Result: Taxable Income of $76,000 and Tax Owed of $0

Contrast this with a couple that receives wage income.

W-2 Income from Wages of $50,000
Plus: Long-term Capital Gain of $50,000
Less: Standard Deduction of $24,000
Result: Tax Owed of $3,943

Finally, consider taxpayers with Social Security income. If their taxable Social Security income totaled $24,000, they could still receive $77,400 in dividend and long-term capital gain income and pay no federal tax. Any taxpayer whose taxable income does not exceed the 12% bracket may benefit.

The new tax law can be a powerful way for taxpayers in their early retirement years to increase the tax basis of their investments without incurring tax (by selling investments and realizing untaxed capital gains). Whether you can take advantage of these provisions is a matter for discussion with your tax and investment advisors. You will most likely owe state income tax in most states, so consult your tax advisor for details on your particular situation.

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