The 0% Bracket

Taxes in Retirement

Buried in the tax code is a rate almost nobody plans around, because it sounds too good to be a real thing.

Zero percent. On long-term capital gains and qualified dividends. For a married couple in 2026, that 0% rate covers taxable income all the way up to roughly $98,900.

Not a loophole. Not a credit you apply for. Just the standard rate on investment gains for anyone whose taxable income lands under the line. And in the gap years between retirement and RMDs, an enormous number of retirees are under that line without realizing what it lets them do.

The math on a hypothetical couple

Both 64, retired, not yet claiming Social Security, sitting on a brokerage account with $600,000 in it, of which $250,000 is unrealized gain from thirty years of holding index funds. Invented for this piece, not real clients.

Their taxable income this year without doing anything: about $18,000 (a little interest, some dividends), before deductions. After the $32,200 standard deduction plus the age extras, taxable income is essentially zero.

Now they do something counterintuitive. They deliberately sell $95,000 worth of those long-held positions, realizing about $40,000 of gain. Then they buy the exact same funds back the next minute. (No wash sale rule on gains, only on losses.)

Their taxable income rises to about $58,000 minus deductions, comfortably under the ~$98,900 line. Federal tax on the $40,000 of realized gain: $0.

Same investments, same account, same money. Except now the cost basis on those shares is $95,000 instead of $55,000. Forty thousand dollars of future capital gains tax just disappeared, permanently, for the cost of a few clicks.

Do that every gap year and a couple can wipe out $200K to $400K of embedded gains at a 0% rate that would have cost 15% (or 23.8% with NIIT) later, once Social Security and RMDs push them over the line.

Harvesting vs. converting

Sharp readers will notice this competes with the Golden Window strategy. Roth conversions ALSO fill up the low brackets in these same years. You can't use the same bracket space twice.

So which wins? It's a matching game. Conversion income is taxed at ordinary rates (10-12% in the low brackets) and buys freedom from RMDs and the torpedo later. Gain harvesting is taxed at 0% and buys a permanent step-up in basis on the taxable account.

The usual answer: fill the low ordinary brackets with conversions FIRST (10-12% now beats 22-24% later), and let the harvested gains stack ON TOP, since gains sit "above" ordinary income and enjoy the 0% rate as long as the total stays under the line. Many households can do a meaningful conversion AND harvest gains in the same year. It takes some modeling, but that's what gap years are for.

Who's standing in the 0% zone without knowing

Anyone retired but pre-Social Security. Anyone with a big taxable brokerage account and modest other income. Surviving spouses in a lower-income year. Anyone whose only "problem" is that their taxable account has grown too well.

And it's a Texas-flavored gift, again: some states tax capital gains as ordinary income even when the federal rate is 0%. Texas taxes them at nothing. Zero federal, zero state, done.

The catches (there are a few)

Harvested gains count toward provisional income, so if you're already receiving Social Security, harvesting can fire the tax torpedo. Harvest before benefits start, or model carefully after.

They also count for IRMAA if you're 63+, and for the ACA subsidy cliff if you're pre-65 and buying marketplace insurance. A big harvest can cost you a subsidy that's worth more than the tax you saved. Check both before you sell.

And a step-up in basis at death (the step-up letter) already wipes out embedded gains for your heirs, so shares you're certain you'll never sell in your lifetime may not need harvesting at all. Harvest what you'll spend. Leave what you'll leave.

The 0% bracket doesn't announce itself. It just sits there every gap year, unused by almost everyone who qualifies, until RMDs close it for good.