$142,000 of tax-free income? A new opportunity for many.

What is the best tax rate? Several tax changes have come together to make the elusive 0% rate a possibility for many.

For long-term investors in diversified portfolios, the recent passage of the One Big Beautiful Bill Act (OBBBA) did not create any material changes regarding the taxation on their investment portfolios. The bill included the extension of the 2017 Tax Cut and Jobs Act (TCJA) which prevented individual rates from increasing. That is the main takeaway. But one of the areas that caught our eye was the combined impact of the changes or increases in:

1. Standard Deduction
2. New Social Security Deduction for Seniors (phased out above specific levels)
3. New Below-the-Line Charitable Contribution Deduction
4. Continued tax bracket creep due to inflation

Combine these changes, and it is possible for taxpayers who are both 65+ to have $142,000 of tax-free income at the federal level.

1. Standard Deduction:

• Increases to $15,750 for single filers and $31,500 for joint filers in 2025.

2. Social Security Deduction for Seniors

• Starting in 2025, the OBBBA provides a new $6,000 deduction for taxpayers age 65 and older per qualifying taxpayer, which phases out at a 6 percent rate when one’s income exceeds $75,000 for single filers and $150,000 for joint filers.
• The deduction is fully phased out at $175,000 for single filers and $250,000 for joint filers. The deduction will be available to both itemizers and non-itemizers.
• Absent government action, this deduction will expire after 2028.

3. Below-the-Line Charitable Contribution Deduction

• A new $1,000 charitable deduction per taxpayer will be available to taxpayers without regard to whether they itemize or take the standard deduction.

4. Continued Tax Bracket Creep

• As recently as 2022, a couple filing jointly could have up to $83,350 of unearned preferential income (long-term capital gains, qualified dividends, carried interest) with a corresponding tax rate of 0% (if no other taxable income). In 2025, due to year-over-year increases in tax brackets, that same 0% threshold increased to $96,700, representing a $13,350 increase in only four tax years.
• Recall that taxpayers pay the progressive tax rates on ordinary income first. Tax amounts on unearned income start where the ordinary income stops. And ordinary income is reduced by deductions like the Standard Deduction.
• The flow chart below illustrates the progressive nature of the different types of taxable income. Note the attractive 0% tax rate (highlighted in red) for the long-term unearned income between $0 – $96,700:

Putting it together

Assume a couple – both 65 years old – with $31,500 of combined wages from part-time jobs, $12,000 of taxable interest income, $2,000 of short-term capital gains, and $96,700 of long-term capital gains from selling appreciated stocks/mutual funds for a total Adjusted Gross Income (AGI)of $142,000.  Applying the previously mentioned deductions:

In this example, the remaining taxable income conveniently equals the amount of long-term capital gains. This amount would fill the 0% tax rate bucket shown in red on the flow chart. Any realized long-term capital gains above $96,700 would be taxed at 15% up to $250,000*.

Many advisors will have clients who have material amounts in their investment accounts with income levels near this example. Remember, the amount of assets in the client’s investment portfolio is not the same as taxable income, especially for clients in retirement.

The opportunity to “fill” the 0% tax bracket with realized gains is a planning opportunity that should not be passed up. The proceeds can be pointed to a new tax-managed portfolio or security.  Or they can immediately repurchase the same security since there is no wash sale rule for gains.

This tax-free basis resetting is a great way to either realize tax-free income or set the portfolio up to have lower taxes going forward.  What is the favorite tax rate for investors?  Goose Egg, Nill, Zilch, Nada, Nichts, Zip, 0%.