capital gains: is there an effective tax rate?

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mrfeh

Thinks s/he gets paid by the post
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Hi folks.

Simple question - are taxes on capital gains tiered like they are for income? For example, let's say the cap gains rate under $70K is 0% and cap gains rate over $70K is 15%. Your capital gains for the year are your only income and total $100K.

Are the taxes due $15K ($100K * .15), or are they $4.5K ($30K * .15)?

Thanks.
 
I think I found the answer myself - capital gains are not considered income. So, in my example, there would be $0 taxes due, as the tax filer didn't have any income.
 
mrfeh said:
I think I found the answer myself - capital gains are not considered income. So, in my example, there would be $0 taxes due, as the tax filer didn't have any income.
Click to expand...

Ahhhhh..... Maybe ya better continue yer research and check into that further......
 
There are sort of long-term capital gains tax brackets. Short-term gains (held less than a year) are taxed as income.

In your example $70k of the capital gains are taxed at 0% and $30k at 15%. However, normal income can affect this, bumping some of the LTCG's out of the 0% rate and into the 15% rate. Kind of a nasty marginal tax rate in some cases where the additional income is taxed and additional LTCG's are taxed at the same time.
 
Animorph said:
There are sort of long-term capital gains tax brackets. Short-term gains (held less than a year) are taxed as income.

In your example $70k of the capital gains are taxed at 0% and $30k at 15%. However, normal income can affect this, bumping some of the LTCG's out of the 0% rate and into the 15% rate. Kind of a nasty marginal tax rate in some cases where the additional income is taxed and additional LTCG's are taxed at the same time.
Click to expand...

Right, I'm assuming all cap gains are long term. Sorry for not specifying that.

What do you feel the cap gains taxes would be if there was $0 income for the year? Online calculators have indicated $0, because the filer is in the 0% bracket.
 
Why not use Turbotax to figure out how much taxes you would owe? Assuming that your $100K in capital gains are long term and your only income for that year, TT (2012) says you would owe ~$1,500 in Federal income tax if your are married filing jointly and over $8,200 if you are single.
 
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The easiest way is to run this through a tax program like Turbo Tax. Even if you do last year's it'll be close enough as long as the laws don't change. What you'll notice is that you'll be using the Qual Div and Cap Gains Worksheet, and once your divs + cap gains + income (none in your case) - deductions & exemptions put you over the 15% rate you start paying 15% on the amount above, so it is $4.5K in your example, less the effect of deductions and exemptions.

It's not hard to run that worksheet by hand and see this. http://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf
 
mrfeh said:
Hi folks.

Simple question - are taxes on capital gains tiered like they are for income? For example, let's say the cap gains rate under $70K is 0% and cap gains rate over $70K is 15%. Your capital gains for the year are your only income and total $100K.

Are the taxes due $15K ($100K * .15), or are they $4.5K ($30K * .15)?

Thanks.
Click to expand...

You didn't clearly specify whether the LTCG is gross income or taxable income. IOW, a married couple (under 65) with no dependents filing jointly with 100K in LTCG gross income would have a standard deduction of 12.3K plus 2 exemptions totaling 7.8K. Thus, the taxable income would be 79.9K - all LTCG. For 2013, the first 72.5K would be taxed at 0% and the next 7.4K at 15% for a total tax due of 1.11K. If the couple itemized, the tax would be less, perhaps even zero.

If the 100K in your example is taxable income (after deductions and exemptions), the tax would be (100K - 72.5K) x 0.15 = 4.125K, similar to your latter calculation, but with 2013 rates.
 
The key concept that you seem to be missing (not uncommon because it is difficult to describe CG taxation in a few words) is that LTCG is income and is included in your taxable income that determines what tax bracket you are in (for the purposes of LTCG taxation).........so in your example, your 2nd answer is correct...........assuming you were talking about taxable income (after deductions/exemptions) were deducted and that the tiers were as you stated.

The stacked bar concept illustrated here in a 12/11/11 post by tfb may be helpful in understanding this ........a picture is worth 1K words....
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=86849
 
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FIRE'd@51 said:
You didn't clearly specify whether the LTCG is gross income or taxable income. IOW, a married couple (under 65) with no dependents filing jointly with 100K in LTCG gross income would have a standard deduction of 12.3K plus 2 exemptions totaling 7.8K. Thus, the taxable income would be 79.9K - all LTCG. For 2013, the first 72.5K would be taxed at 0% and the next 7.4K at 15% for a total tax due of 1.11K. If the couple itemized, the tax would be less, perhaps even zero.

If the 100K in your example is taxable income (after deductions and exemptions), the tax would be (100K - 72.5K) x 0.15 = 4.125K, similar to your latter calculation, but with 2013 rates.
Click to expand...


Your example of how inexpensive long term cap gains can be makes me think of previous discussions regarding how effective TIRA's might or might not be in comparison.

RMD's are only a few years away for this geezer. I have a chunk of long held TSM in both my taxable portfolio and in my IRA. The forthcoming taxes on the RMD's from the TIRA make me cringe. The LTCG from the taxable account, not so much.
 
kaneohe said:
The key concept that you seem to be missing (not uncommon because it is difficult to describe CG taxation in a few words) is that LTCG is income and is included in your taxable income that determines what tax bracket you are in
Click to expand...

Thanks. This is the core question I was hoping to have answered.
 
Currently, STCG are ordinary income subject to ordinary tax rates. LTCG are 0% for taxpayers in the 15% bracket or lower and 15% for those in higher brackets.

Tax Rate on Short-Term Capital Gains

Capital gain income from assets held one year or less is taxed at the ordinary income tax rates in effect for the year, ranging from 10% to 35%.

Tax Rate on Long-Term Capital Gains

Capital gain income from assets held longer than one year are generally taxed at a special long-term capital gains rate. The rate that applies depends on which ordinary income tax bracket you fall under.
  • Zero percent rate if your total income (including capital gain income) places you in the ten or fifteen percent tax brackets.
  • 15% rate if your total income (including capital gain income) places you in the twenty-five percent tax bracket or higher.
Click to expand...
 
pb4uski said:
LTCG are 0% for taxpayers in the 15% bracket or lower and 15% for those in higher brackets.
Click to expand...

Right, but how is the tax calculated? Is it $100K * .15 or $72.5K * 0 + $27.5K * .15 ?
 
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mrfeh said:
According to this calculator (specifying 25% federal bracket), the tax would be $15K. Are they wrong?

Capital gains (losses) tax estimator | Calculators by CalcXML
Click to expand...

This page agrees with the calculator above. So, using my original example, capital gains taxes due would be $15K. Thanks everybody.

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

Excerpt:

Example: Say you bought ABC stock on March 1, 2010, for $10,000. On May 1, 2012, you sold all the stock for $20,000 (after selling expenses). You have a $10,000 capital gain ($20,000 – 10,000 = $10,000). If you are in the 25% tax bracket, you pay $1,500 in capital gains tax ($10,000 X 15% = $1,500). This amount is in addition to your tax on your ordinary income.
 
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.
 
mrfeh said:
According to this calculator (specifying 25% federal bracket), the tax would be $15K. Are they wrong?

Capital gains (losses) tax estimator | Calculators by CalcXML
Click to expand...

Either they are wrong or you are entering the data incorrectly. Go back and look at my calculation which I know is correct for the situations I described.

If your taxable income is solely LTCG, only the part of it which is above the 15% bracket (over 72.5K) is taxed at 15%.
 
mrfeh said:
Right, but how is the tax calculated? Is it $100K * .15 or $72.5K * 0 + $27.5K * .15 ?
Click to expand...

Playing with a calculator it seems to be the latter.

If I create a couple 50 yo with $90k of LTCG as only income the tax is nil; at LTCG of $190k the tax is $14970 and at LTCG of $1,090k the tax is $152,895 so any amounts gt $90k (which ~ top of 15% bracket after standard deduction and exemptions) are taxed at 15%.
 
mrfeh said:
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.
Click to expand...
No, that doesn't happen. Only $1 is taxed at 15%.

For the most part the IRS code does not have spikes like that. One counter example is the ACA subsidy. If you go $1 over the subsidy limit, the subsidy is gone so that extra $1 could cost you a lot, depending on how much your health insurance coverage costs.
 
mrfeh said:
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.
Click to expand...
This is incorrect - your tax would be 15 cents (15% of $1).
 
FIRE'd@51 said:
Either they are wrong or you are entering the data incorrectly. Go back and look at my calculation which I know is correct for the situations I described.

If your taxable income is solely LTCG, only the part of it which is above the 15% bracket (over 72.5K) is taxed at 15%.
Click to expand...

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?
 
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