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How You Can Pay Zero Tax on Your Investments

By Dan Caplinger - Updated Feb 15, 2017 at 11:38AM

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Tax-free investment income is hard to come by, but some taxpayers can get a lot of it. Find out how here.

Nobody likes paying taxes on investments. But some lucky taxpayers are able to get a 0% rate on some of their investment income.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, runs through the rules for the 0% rate, explaining how it can apply to both long-term capital gains and qualified dividend income. Dan notes that on the dividend side, the rate only applies for ordinary stocks, with certain pass-through entities like real-estate investment trusts Annaly Capital ( NLY -0.49% ) and Chimera Investment ( CIM -1.87% ) paying out dividends that get taxed at ordinary income tax rates. Similarly, business development companies Prospect Capital ( PSEC -1.06% ), Ares Capital ( ARCC -0.24% ), and Main Street Capital ( MAIN -1.10% ) have traditionally paid out a combination of qualified and non-qualified dividend income, making their distributions only partially eligible for the 0% rate. Dan concludes that if you have room in those lower two brackets, selling stocks at a gain can be a smart move to make the most of your tax-free opportunity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Annaly Capital Management, Inc. Stock Quote
Annaly Capital Management, Inc.
NLY
$8.17 (-0.49%) $0.04
Chimera Investment Corporation Stock Quote
Chimera Investment Corporation
CIM
$15.73 (-1.87%) $0.30
Prospect Capital Corporation Stock Quote
Prospect Capital Corporation
PSEC
$8.39 (-1.06%) $0.09
Ares Capital Corporation Stock Quote
Ares Capital Corporation
ARCC
$20.33 (-0.24%) $0.05
Main Street Capital Corporation Stock Quote
Main Street Capital Corporation
MAIN
$43.97 (-1.10%) $0.49

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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