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How Low Can Capital Gains Tax Go?

What's better than paying today's 15% or 20% maximum tax rates on long-term capital gains and qualified dividends? How about paying 0%? That's not a misprint. If you qualify, the tax on a portion or all of your net long-term capital gain is an absolute zero.

What's more, this unique tax break isn't necessarily reserved for people who don't make much money. In some cases, it also can benefit those who normally earn high incomes.

According to basic rules for taxing capital gains, short-term gains from selling stocks, bonds, or other capital assets that you've owned for a year or less are taxed at ordinary income rates reaching as high as 39.6%. If you've owned the assets for more than one year, your profit on a sale is treated as a long-term capital gain and taxed at a maximum of 15% for those in most tax brackets or 20% if you're in the top ordinary income bracket of 39.6%.

However, short-term and long-term gains for the year may be offset in whole or in part by losses you've taken on other asset sales.

Similar rules apply to "qualified" dividends that meet specified requirements, including that you've held the stock in question for at least 61 days.

But some investors can do even better than these favorable rates. If you are in either of the two lowest ordinary income tax brackets—with rates of 10% or 15%—your net long-term gains will be taxed at the 0% rate. This tax break often is available to young children and other investors who don't earn much in wages. But don't assume you can't jump on the bandwagon.

For example, suppose you earn an annual salary of $100,000 but you expect to incur a business loss of $50,000 from your S corporation in 2017. That leaves you with $50,000 in taxable income for the year to report on a joint tax return.

Under tax rates in effect for 2017, the upper threshold of the 15% tax bracket is $75,900. In other words, you can realize a long-term capital gain of up to $25,900 without passing that upper limit and without paying any tax on the gain. And if you realize a larger gain, you still can benefit from the 0% tax on the first $25,900.

Now is a good time to assess your personal situation for the year. If you're in line for the 0% tax rate and it otherwise makes good investment sense to sell assets on which you'll realize long-term capital gains, don't miss out on the opportunity.