capital gains: is there an effective tax rate?

[MichaelB]

Could you comment on this page, please? The way I read it, you'd be taxed 15% on the entire $100K:

Long-Term Capital Gains: How Much Tax Will I Owe? - TaxACT

Perhaps that's because they're assuming other income (not LTCG) has already put the filer above the 15% bracket?

Seems poorly written to me.

 

[FIRE'd@51]

Could you comment on this page, please? The way I read it, you'd be taxed 15% on the entire $100K:

Long-Term Capital Gains: How Much Tax Will I Owe? - TaxACT

Perhaps that's because they're assuming other income (not LTCG) has already put the filer above the 15% bracket?

The bolded part describes their example. From the article:

Taxpayers whose taxable income is above those limits pay 25% to 35% on their highest taxable dollars of ordinary income. Their capital gains rate is 15%.

 

[mrfeh]

Thanks again everybody. Good to know there aren't extremely steep steps in taxes due as a result of LTCG.

 

[kaneohe]

One final comment - I find it a little troubling that your tax bill can spike in such a way, if most/all of your income is from capital gains.

Using a convoluted example of all income is from cap gains (married, filing jointly), if your gains are $72500, your tax is $0. If your gains are $72501, your tax is $10875.

This is not correct. Your intuition on how things should work.....smoothly/continuously...is correct but your concept is not still not fully formed...........the stacked bar chart link above really helps you to conceptualize things. The LTCG above the 15/25% bracket is taxed at 15%
so that is $1 x 15% = 15 cents , basically 0 and the LTCG below that boundary is taxed at 0% which is 0 so now things are nice and smooth w/o step function increases.

 

[kaneohe]

Could you comment on this page, please? The way I read it, you'd be taxed 15% on the entire $100K:

Long-Term Capital Gains: How Much Tax Will I Owe? - TaxACT

Perhaps that's because they're assuming other income (not LTCG) has already put the filer above the 15% bracket?

You may have overlooked this paragraph which is the key:
If you would be in the 10% or 15% ordinary income tax rate bracket except for the capital gains this year, you may have some capital gains taxed at 0% and some taxed at 15%.

 

[Jack_Pine]

One final comment - I find it a little troubling that your tax bill can spike in such a way, if most/all of your income is from capital gains.

Using a convoluted example of all income is from cap gains (married, filing jointly), if your gains are $72500, your tax is $0. If your gains are $72501, your tax is $10875.

I'm not retired and have always had earned income, so I'm not used to this behavior of the tax code.

This is new to be also. I thought it was 15% plus 5% IL state no matter what. Always something new to learn

 

[kaneohe]

Thanks again everybody. Good to know there aren't extremely steep steps in taxes due as a result of LTCG.

don't be too sure.........not strictly related to LTCG but income of all sorts.........
there apparently is a cliff re: subsidies under ACA if you earn $1 too much....
http://www.early-retirement.org/forums/f38/dumb-question-about-aca-vs-income-67548.html

maybe a better statement is : not too many extremely steep steps

 

[ducky911]

I like to run it through this.



Tax Calculator - Estimate Your Income Tax for 2013

think I got this from someone here on a old post anyway fast answer

 

[scrabbler1]

One thing to remember about cap gains is that short-term cap gain distributions (from mutual funds, for example) are treated as ordinary dividends and cannot be offset by short-term or long-term cap losses on Schedule D from your own sales of securities or mutual funds. (If you have overall cap losses, up to $3,000, you can use that to offset ordinary income.) Back in 2010 I had this huge short-term cap gain distribution from a bond mutual fund and it was all subject to income taxes as ordinary income. It nearly doubled my tax bill.