There's a legal way to avoid paying any federal tax on income from stock dividends and capital gains. The catch is, you can't have a great deal of income.

It's one of those federal tax provisions that may seem more symbolic than practical, because people with moderate to low incomes are less likely to own stocks, receive dividends or declare capital gains from the sale of real estate or securities. Most people who do have stocks and mutual funds in taxable (nonretirement) accounts pay a 15 percent federal tax on dividends and capital gains - a bargain compared to the income and payroll taxes on wage income.

However, more than one out of 11 federal tax returns recently included tax-free dividends and capital gains, and that represents a lot of people. About a third of them were single, while most were married couples filing joint returns.

The important thing about the federal tax rules is to realize what they mean in terms of saving money and deciding when to sell stocks or mutual funds.

In a broad sense, the tax code rewards people who make long-term investments in stocks, while penalizing savers. Interest earned on savings and money market accounts is taxable, while for many people, income from stock dividends is tax-free.

Short-term capital gains, such as from selling a stock held for less than a year at a profit, are taxed at regular income tax rates, while long-term gains can be tax-free.

A key point to keep in mind is that qualified dividends and capital gains are only tax-free if your total taxable income falls within the 10 percent or 15 percent tax brackets - and that income includes the dividends and capital gains.

For this year (for the tax return you'll file in 2015), the top of the 15 percent tax bracket is $73,800 for a married couple filing together, and $36,900 for a single person with no dependent children.

So, if a married couple had taxable income of $70,000, and up to $3,800 in long-term capital gains, they would pay no federal tax on the gains.

A few examples of how this can play a role in tax planning:

For people who have income that varies year to year, the zero-percent rate on qualified dividends and long-term capital gains might apply some years, but not others. Declaring capital gains (the difference between the purchase and sale prices) in a year when a person's income was lower than usual could mean keeping all the gains, rather than just 85 cents on the dollar.

For people who have moderate incomes and potentially large capital gains - say, from company stock options - spreading those gains out across several years could yield tax savings.

For people who bought some stock or mutual funds when their incomes were rising, they might want to consider capturing tax-free gains by selling before their incomes rise high enough that those gains would be taxable. Of course, they could always buy the same stock or mutual fund again.

Tax-free dividends are worth more than taxable interest earnings, so a stock paying a dividend of 2.55 percent is like a certificate of deposit paying 3 percent. Of course, companies can raise or lower dividends, and the underlying stock can rise or fall in value.

The advantageous tax treatment of dividends and gains that is available to the majority of taxpayers is not reason by itself to invest in stocks, but knowing the rules is how we all can make smarter decisions about our finances.

Reach David Slade at 937-5552