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Tax argument with wife, help resolve!
Old 04-08-2016, 10:07 AM   #1
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Tax argument with wife, help resolve!

Wife asked a question that I can't answer before 2nd cup of coffee (brain not at 100% yet).

If you had $20,000 in short term capital gains and $10,000 in long term capital gains, and married filing jointly you have about $20,000 in personal exemption plus standard deduction, does that cover the $20,000 in short term capital gains and thus the $10,000 in long term capital gains is taxed at 0%?

In other words, is higher taxed income covered first by the deductions and exemptions?

She was expecting that the long term capital gains plus half the short term would be covered by the $20,000 in deductions/exemptions and you would owe tax on the remaining $10,000 of short term capital gains. On one cup of coffee so far, I was 99.9% sure it was the other way and you would owe no tax, but now I am doubting myself.
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Old 04-08-2016, 10:10 AM   #2
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Repeat after me: "Yes Dear, you're right .... Why didn't I think of that?"
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Old 04-08-2016, 10:36 AM   #3
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Generally good advice for a good marriage, but after a 2nd cup of coffee I have determined that I am right. I even just ran the scenario in H&R Block software for 2015 and zero tax was due for the case I outlined.

So on my side we have H&R Block and me with 2 cups of coffee, and on the other side we have my wife.

Wife still wins, but I am right.
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Old 04-08-2016, 10:54 AM   #4
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Yes, you are correct. Confirmed it on Taxcaster. For a nice graphical way to think about it see here tfb post on 12/11/11 https://www.bogleheads.org/forum/viewtopic.php?t=86849

Think about a block of QDIV/LTCG floating on TOP of a block of ordinary income
(wages/pension/STCG). Your deductions/exemptions eat away at the bottom of the stacked bars and determine the zero point of your taxable income. The more favorably taxed QDIV/LTCG survives to be taxed at the lower rates.
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Old 04-08-2016, 11:44 AM   #5
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Quote:
Originally Posted by kaneohe View Post
Yes, you are correct. Confirmed it on Taxcaster. For a nice graphical way to think about it see here tfb post on 12/11/11 https://www.bogleheads.org/forum/viewtopic.php?t=86849

Think about a block of QDIV/LTCG floating on TOP of a block of ordinary income
(wages/pension/STCG). Your deductions/exemptions eat away at the bottom of the stacked bars and determine the zero point of your taxable income. The more favorably taxed QDIV/LTCG survives to be taxed at the lower rates.
+1

I never really understood how this worked until I first saw a graphical explanation. It does not reveal easily by just reading the forms/worksheets.

-gauss
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Old 04-08-2016, 12:43 PM   #6
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Quote:
Originally Posted by kaneohe View Post
Yes, you are correct. Confirmed it on Taxcaster. For a nice graphical way to think about it see here tfb post on 12/11/11 https://www.bogleheads.org/forum/viewtopic.php?t=86849

Think about a block of QDIV/LTCG floating on TOP of a block of ordinary income
(wages/pension/STCG). Your deductions/exemptions eat away at the bottom of the stacked bars and determine the zero point of your taxable income. The more favorably taxed QDIV/LTCG survives to be taxed at the lower rates.
Elegantly put.

Fermion, my own distribution of investment income is similar to what you wrote, and my PE+Itemized Deduction very nearly offsets my ordinary income, leaving the QDIV+LTCG taxed at zero and, for 2015, my total tax bill nearly zero.
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Old 04-08-2016, 12:55 PM   #7
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Quote:
Originally Posted by Fermion View Post

.... Wife still wins, but I am right.
Sounds like you might soon have an argument with your wife unrelated to taxes .
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Old 04-08-2016, 01:37 PM   #8
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Deductions apply against ordinary income first - yay!
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Old 04-08-2016, 02:57 PM   #9
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I don't even understand the question. But just tell your DW if she disagrees that she can do the taxes next year with any software she chooses and ten bucks says she'll immediately tell you you're right.
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Old 04-08-2016, 04:21 PM   #10
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I pay tax on LTCG, it is just a lower rate than ST.
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Old 04-08-2016, 04:27 PM   #11
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I use Taxcaster so there's no argument. Actually no argument in my house regarding tax. I just do it.


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Old 04-08-2016, 05:36 PM   #12
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Another graphical approach I find helpful:

https://www.kitces.com/blog/understa...p-up-in-basis/
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Old 04-09-2016, 09:29 AM   #13
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Did you have an "argument" or a discussion?

There can be no winner in a spousal "argument"
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Old 04-09-2016, 12:54 PM   #14
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Whether or not you're right, for a long and happy marriage (27 long years so far), the only correct answer is "Yes Dear, You're Right". Then do what needs to be done and don't let her know the details. And remember to put the toilet seat down.
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Old 04-10-2016, 04:10 AM   #15
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happy wife , happy life , right or wrong she is always right .

the train to sex-town does not stop at right ha ha ha
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