One of the last things you want to worry about in retirement is taxes. However, since taxes affect how much hard-earned money you keep, a key area, sometimes overlooked by retirees, deserves some attention: capital gains.
Maybe you're considering selling a stock you've held for many years or downsizing your longtime family home. Though seemingly straightforward for some, these kinds of decisions can have significant tax implications.
In addition to the personal and potentially emotional aspects of those and similar financial moves, capital gains tax can help preserve or unexpectedly reduce your retirement nest egg.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here’s more of what you need to know.
Capital gains considerations in retirement
Capital gains can intersect with everything from tax brackets, Social Security benefits, and Medicare premiums to required minimum distributions (RMDs) and home sales. (There are also state capital gains taxes to think about.)
So, appreciating the connections can help you optimize your retirement tax strategies. Let's consider each of these areas.
Tax brackets
Some retirees end up in a lower federal income tax bracket, which can be helpful when it comes to capital gains.
However, it should be noted that being in a lower bracket in retirement may not be as common as you might expect. Some retirees will end up in the same or higher bracket in retirement due to multiple income sources, fewer tax deductions, large withdrawals from pre-tax retirement savings accounts, etc.
If you are a retiree in a lower tax bracket than when you were working, you may benefit from those favorable tax brackets while realizing long-term capital gains.
- Single filers with taxable income up to $47,025 can realize long-term capital gains at a 0% rate for 2024.
- Married couples filing jointly can realize gains at 0% up to $94,050 of taxable income.
- The lower tax bracket advantage allows retirees to potentially sell appreciated assets while minimizing tax impact.
Timing asset sales strategically helps you take advantage of retirement years with lower income and realize gains at preferential rates.
Social Security and capital gains
Capital gains can also affect tax on your Social Security benefits. Keep in mind that up to 85% of Social Security benefits can be subject to tax depending on your overall income, including capital gains.
- The calculation that determines how much of your Social Security benefits are taxable includes realized gains.
- So, significant capital gains in a single year can push more of a retiree's Social Security benefits into taxable territory.
To manage this, consider spreading capital gains realizations over multiple years. Or, you might offset gains with losses through tax-loss harvesting. The goal is to maintain a lower overall taxable income and reduce the impact of taxes on Social Security benefits.
Also, remember that there is no specific age at which you can avoid paying taxes on Social Security benefits. Though proposals are floating around Congress to eliminate federal tax on Social Security, how much of your benefits are subject to tax depends primarily on your “combined income.”
Medicare premiums
Capital gains can also affect Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA). High income from capital gains could increase your Medicare Part B and Part D premiums.
- IRMAA is based on modified adjusted gross income (MAGI) from two years prior.
- So, significant capital gains in one year could lead to higher Medicare costs two years later.
Because of this, you should factor in potential IRMAA increases when you plan large asset sales or realize a substantial capital gain.
Also, strategies like Roth conversions or charitable giving can help you manage your overall taxable income and potentially avoid Medicare premium increases.
Required minimum distributions (RMDs)
RMDs from traditional retirement accounts add another layer of complexity to capital gains planning. That’s because required minimum distributions are taxed as ordinary income and can push retirees into higher tax brackets. (RMDs are generally required once retirees reach age 73.)
To help mitigate this, you might consider strategies like:
- Realizing capital gains in years with lower RMDs to spread out the tax impact
- Using Qualified Charitable Distributions (QCDs) to satisfy RMD requirements without increasing taxable income
- Exploring Roth conversions in lower-income years to reduce future RMDs
Honorable mention: Capital gains on home sales
Don't forget that the capital gains tax exclusion enables homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence.
So, generally, if you sell your home for a gain of less than $250,000 (or $500,000 if married, filing jointly), you will not be obligated to pay capital gains tax on that amount.
However, as Kiplinger has reported, there are certain criteria you must meet to qualify for the home sale exclusion. There are also several exceptions to the exclusion rules.
It's good to consult a tax professional if you anticipate selling your primary residence at a gain that exceeds the exclusion limit. They should be able to help you identify strategies to mitigate the tax impact.
State capital gains taxes
Don’t forget that state capital gains taxes can also impact retirement finances. However, several states have no state income tax, which means they generally don’t tax capital gains. (Washington state is an exception.)
But, as Kiplinger has reported, keep in mind that states with no income tax aren’t necessarily better for your budget.
- Some states don’t tax retirement income, which can include capital gains from retirement accounts.
- Colorado, for example, allows a retirement income deduction of up to $24,000 for taxpayers 65 and older, which can offset capital gains. (If you’re 55 to 64, you can deduct up to $20,000.)
- Some states have unique capital gains approaches, like Washington’s controversial 7% tax on long-term capital gains exceeding $250,000 in a year.
For more information: See How All 50 States Tax Retirement Income.
Capital gains retirement taxes: What you can do
Whether you’re a recent retiree or still planning, capital gains tax considerations can be key to maximizing your retirement funds.
So project your income, including RMDs, Social Security benefits, etc. Try to pinpoint years with lower projected income as potential opportunities for realizing capital gains. Also, don’t forget about state taxes when planning where to retire.
Of course, work with trusted financial advisors and tax professionals to develop strategies that fit your situation. With potential changes looming from the Tax Cuts and Jobs Act (TCJA) at the end of 2025, taxes will be center stage following the 2024 election.
Related
-
Stock Market Today: S&P 500 Hits New High as Micron SoarsThe main indexes gained ground Thursday as strong earnings from memory chipmaker Micron fueled AI optimism.
-
With Mortgage Rates Falling, Here's How Much You Could SaveAs mortgage rates fall, you could potentially save thousands over the life of your loan.
-
Do You Need to Worry About Mansion Taxes?Mansion Tax If you’re in the market for a high-value home, you may face an additional tax rolled into your closing costs.
-
Do You Stop Paying Taxes on Social Security at a Certain Age?Social Security There’s some confusion over whether you can escape taxes on Social Security benefits based on age.
-
Is an Annuity Worth It? Tax Pros and ConsRetirement Knowing how an annuity might impact your tax situation can be confusing. Here are some advantages and downsides to consider.
-
Incorrect ERC? IRS Points to Five New Red FlagsTax Credits These signs could mean there’s an error in your Employee Retention Credit claim.
-
Five December 31 Tax Deadlines for RetireesThe end of the year will be here before you know it, so it might be a good idea to start thinking soon about what you need to do for taxes before it arrives.
-
Will North Dakota Property Tax Be Eliminated?Property Tax A new property tax proposal will be a key ballot item for the Peace Garden State.
-
IRS Has No Set Plan to Replace Old TechIRS What could old IRS technology mean for your federal tax return and cybersecurity?
-
What Time is the Mega Millions Drawing?Lottery Tax With a high-stakes jackpot, the payout (less some tax) is anyone’s to win.
