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capital gains: is there an effective tax rate?
Old 07-23-2013, 12:54 PM   #1
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capital gains: is there an effective tax rate?

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.
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Old 07-23-2013, 01:31 PM   #2
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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.
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Old 07-23-2013, 01:49 PM   #3
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Originally Posted by mrfeh View Post
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.
Ahhhhh..... Maybe ya better continue yer research and check into that further......
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Old 07-23-2013, 01:51 PM   #4
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Ahhhhh..... Maybe ya better continue yer research and check into that further......
Please explain, if you're saying that statement is incorrect.
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Old 07-23-2013, 01:58 PM   #5
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Federal Capital Gains Tax Rates, 1988-2013 | Tax Foundation

2013 info is at the bottom of the page.
Yes, I'm aware of the cap gains tax rates. Going back to my example - I believe the cap gains taxes would be $0. Are you saying that's incorrect? If yes, why?
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Old 07-23-2013, 02:00 PM   #6
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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.
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Old 07-23-2013, 02:03 PM   #7
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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.
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.
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Old 07-23-2013, 02:05 PM   #8
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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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Old 07-23-2013, 02:05 PM   #9
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Originally Posted by mrfeh View Post
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.

The filer is NOT in the 0% tax bracket.

I'm having a problem doing a cut and paste with the text of the info, so click here and it will explain.

Capital Gains Tax Rates: Tax Rates for Short-Term & Long-Term Capital Gains
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Old 07-23-2013, 02:06 PM   #10
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Why not just run it through TurboTax and see what comes up?

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The filer is NOT in the 0% bracket.
+1
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Old 07-23-2013, 02:07 PM   #11
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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...heet_1040i.pdf
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Old 07-23-2013, 02:43 PM   #12
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Originally Posted by mrfeh View Post
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.
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.
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Old 07-23-2013, 02:51 PM   #13
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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/view...p?f=10&t=86849
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Old 07-23-2013, 02:53 PM   #14
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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.

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.
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Old 07-23-2013, 03:32 PM   #15
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Originally Posted by kaneohe View Post
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
Thanks. This is the core question I was hoping to have answered.
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Old 07-23-2013, 03:39 PM   #16
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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.
According to this calculator (specifying 25% federal bracket), the tax would be $15K. Are they wrong?

Capital gains (losses) tax estimator | Calculators by CalcXML
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Old 07-23-2013, 03:40 PM   #17
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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.

Quote:
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.
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Old 07-23-2013, 03:43 PM   #18
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LTCG are 0% for taxpayers in the 15% bracket or lower and 15% for those in higher brackets.
Right, but how is the tax calculated? Is it $100K * .15 or $72.5K * 0 + $27.5K * .15 ?
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Old 07-23-2013, 03:54 PM   #19
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According to this calculator (specifying 25% federal bracket), the tax would be $15K. Are they wrong?

Capital gains (losses) tax estimator | Calculators by CalcXML
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.
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Old 07-23-2013, 04:04 PM   #20
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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.
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