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THE IRS RECENTLY announced inflation adjustments for the tax year 2026.
2 quick changes:
For single taxpayers, the standard deduction rises to $16,100 for 2026, an increase of $350 from 2025.
For married couples filing jointly, the standard deduction rises to $32,200, an increase of $700 from tax year 2025.
For single taxpayers, long-term capital gains are taxed at 0% if the taxable income is up to $49,450 ($98,900 for married couples filing jointly). Note: Brackets are based on taxable income, not gross.
Tax planning with capital gains
Using the 0% long-term capital gains rate can be a good way to minimize your tax bill and retire early. For an investment to qualify as long-term, you must hold it for more than a year.
For example, say Bob is single, did fairly well financially in his early years, and decided to retire at 50. He paid off his home and needs $65,000 per year to live on. He sells $65,000 worth of Vanguard ETFs (say $5,000 was the basis he originally bought it for).
Here’s how his tax return would look:
$60,000 of long-term capital gains ($5,000 is the cost basis for his original investment)
-$16,100 standard deduction
= $43,900 taxable income
Since the taxable income is below $49,450, all of this income will be taxed at 0% on the federal level (assuming no other income sources).
Using the 0% tax rate on capital gains could be a great strategy to sustain your early retirement until age 59 ½. Additionally, these brackets are adjusted for inflation each year, so if you need $62,000 due to inflation next year, it will likely match the new brackets.
Importantly, the $16,100 standard deduction amount (or $32,200 if married filing jointly) can come from any income source. In most cases, it’s actually better to utilize something like an IRA withdrawal or pre-tax 401k to “fill” that income.
For example, Bob could use a Section 72(t), series of substantially equal periodic payments, to withdraw $16,100 from his IRA without a 10% penalty. Then, he can withdraw less from a brokerage account to fill the remaining income. However, by using a 72(t) plan, Bob will need to continue withdrawing this amount until age 59.
Note that tax law could change the numbers. While the OBBBA just made the standard permanent, another law could change that. Also, capital gains tax brackets could technically change too.
Additional opportunities to lower tax
A good friend of mine is going back to school to get his MBA. He did very well financially, so he will live off savings with no income.
This is a perfect opportunity for him to sell stocks in his brokerage account, pay $0 in federal taxes, and immediately buy back the exact same stocks.
Why?
Say he bought 100 shares of VTI 10 years ago for $100 per share. Total cost basis is $10,000. Now, it’s worth $335 per share. If he sells 100 VTI shares, he will have ($335 – $100) * 100 = $25,500 in capital gains.
Now, my friend will pay $0 in federal taxes on these gains and will buy back those same VTI shares for $335 per share.
What this allows him to do is increase the cost basis on those shares from $100 per share to $335 per share, so the next time he sells, his cost basis is much higher (lower capital gains). Note: there is no wash sale on a gain. It only applies to a loss.
This only works if you qualify for the 0% long-term capital gains rate on that initial sale. So, any time you have a low-income year or take extended time off from work, it could be a good time to analyze your portfolio.
Additionally, he can also use Roth conversions instead, but amounts will be smaller if he wants to stay in the 0% tax bracket.
Additional consideration:
1. State Tax
It’s important to take state taxes into consideration. For example, that $25,500 of capital gains could cost $1,275 in state taxes (assuming a 5% tax rate). It’s generally not worth harvesting gains if state tax applies. This is because you may lose more by not being able to invest the state tax than you save by avoiding federal tax, especially if you plan it right in the long term.
However, some states have no tax on capital gains. For example, Texas and Florida are among the states with no income tax (and no capital gains tax)
2. Increased Income
Sometimes a higher income can reduce available itemized deductions (e.g. medical expense deductions are based on AGI) or impact other credits (e.g. the Retirement Savings Credit). It’s important to analyze the full impact based on your unique situation.
Have you used the 0% long-term capital gains bracket to retire early? Share your thoughts in the comments!
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
I did exactly that, captured LTCG up to the ceiling of the 0% tax bracket on the gains, in both tax year 2024 and 2025. Yes, I’ll pay some state income tax but that’s fine with me. If I did a Roth conversion instead I’d still have to pay both Fed and State taxes. The amount captured had over a 100% gain so I’m very happy taking advantage of this conversion for 0.0 Federal. Unlike a Roth, it will not grow going forward tax free. That works in our situation, but probably not for everyone.
Does additional regular income, interest and non-qualified dividends affect the 0% $49,450 long-term capital gain limit? Suppose one maxes out the capital gain limit after taking the standard deduction while receiving $30K in interest payments. How would the extra interest income be taxed on the Federal level? Does it somehow diminish the capital gain limit?
In a way it does. If your income (including interest) plus qualified dividends/long term capital gains put you at the top of the 0% QD/LTCG bracket, any additional income will “push up” those QDs/LTCGs into the 15% bracket. For example, if you’re in the 12% income bracket, incremental income will be taxed at 12%, plus QDs/LTCGs pushed into the 15% bracket, for a total of 27%, the marginal rate on that income.
Thanks for the article, Bogdan! I’m always hungry for tax strategies. Responses from readers is always helpful too.
Great topic, Bogdan, thanks for the updates.
Long term capital gains can also apply to the sale of business assets. A client of mine sold his business via installment payments, eliminating nearly all tax on the sale.
Thanks also for including “additional considerations”. Most income tax and financial maneuvers come with both good and bad news, and it’s important to pay attention to both. For example, I have seen several people take loans from their 401k, and quit their job before the loan was paid off.
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If your adult child makes under 65,500 single or 131,100 married, then you can gift them appreciated stock and they pay no tax on the gains , up to the limit.
In a sort of reverse scenario, I suppose I could have my adult daughter gift me an amount every year up to the annual gift limit. I would invest those funds in a separate brokerage account with her as the beneficiary. She would get the account at my passing with a step-up in basis. No taxes for her even though she was the original source of the funding.
Of course, this would need to be funds earmarked for the appropriate time horizon.
At the time of the gift, they pay no tax on the gains regardless of whether they’re in the 0% range. However, they will be taxed on capital gains when they sell, and their cost basis is from the date of your original purchase, not the date of the gift.
Good post Bogdan.