How to Pay Zero Taxes on Over $100,000 of Income

When you earn W2 income while also receiving long-term portfolio income from the sale of mutual funds, it’s crucial to understand the tax implications. This combination of income types can affect your overall tax liability. Let’s explore how these income sources interact and discuss strategies that may help you Pay Zero Taxes.

Understanding W2 Income and Long-Term Portfolio Income

W2 income refers to earnings from employment. Employers withhold taxes on this income throughout the year. In contrast, long-term portfolio income comes from investments held for over one year. This income is taxed at capital gains rates, which are typically lower than ordinary income tax rates.

Tax Rates for W2 and Long-Term Income

W2 income is taxed based on ordinary income tax brackets. For 2024, these brackets range from 10% to 37%, depending on your income level. Conversely, as nicely illustrated by Nerd Wallet, long-term capital gains are taxed at reduced rates of 0%, 15%, or 20%, depending on your total taxable income.

Impact on Taxable Income

When you combine W2 income with long-term portfolio income, your total taxable income increases. This may push some of your income into higher tax brackets. However, the lower tax rates on long-term gains can help mitigate this effect.

Strategies to Pay Zero Taxes

To potentially Pay Zero Taxes, consider leveraging tax-efficient strategies. First, maximize your contributions to tax-deferred retirement accounts like 401(k)s and IRAs. These contributions reduce your taxable income for the year.

Second, utilize tax-loss harvesting. If you have investments with losses, selling them can offset gains from your mutual fund sales. This strategy can effectively reduce your capital gains tax.



Additionally, if your total taxable income falls within the 0% capital gains tax bracket, you could pay zero taxes on your long-term portfolio income. For tax year 2023 (filed in 2024), this typically applies if your taxable income is below $44,625 for single filers or $89,250 for married couples filing jointly.

Practical Example of How to Pay Zero Taxes on $100,000

Let’s look at a practical example. Let’s say Mary and Mike are a couple filing married filing jointly for tax purposes. Mike is the beneficiary of a million dollar portfolio from his parents but unfortunately was only able to receive a carryover basis on the assets in his portfolio. (A recent tax ruling on portfolio assets carryover basis and step-up basis can be found in the Journal of Accountancy here.)

Upon consulting with their new CPA tax advisor, Mike and Mary came up with a strategic crafty plan to live off approximately $110,000 of income per year for 5 years tax free. Mike and Mary are young and have no kids.

Mike sold $150,000 of his mutual funds with a basis of $63,000 for a capital gain of $87,000. Also, Mike and Mary both worked part time at their neighborhood supermarket earning $12,000 and $15,000 respectively. This brings their total income to $114,000. Mike and Mary stuck to the same routine plan for 5 years.

The standard deduction for 2023 is $27,700 which is more than enough to cover the $27,000 of W2 income received by Mike and Mary. This leaves only the capital gains of $87,000 which is within the zero percent capital gains tax rate.

Upon filing their tax returns every year for 5 years, Mike and Mary has taxable income above $80,000 but pays zero taxes on their income.

Planning and Adjusting

Regular tax planning is essential to ensure you can Pay Zero Taxes when possible. Consider working with a CPA tax advisor to review your financial situation and make adjustments throughout the year. By doing so, you can optimize your income sources and tax strategies.

In summary, understanding the tax implications of combining W2 income with long-term portfolio income is vital. Employing strategic planning and tax-saving techniques can help you manage your tax liability effectively. With careful planning, you might find opportunities to Pay Zero Taxes on your income.

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