Tax question regard 2008 capital gain rate

[teejayevans]

So everybody knows that the LTCG tax rate is 0% next year if you
are in the 15% bracket, 15% if in 25% or higher. My question is:
Joe Taxpayer is single, has no income, sells stock and makes
$40K in LTCG (assuming $40K is the 15% limit, and ignoring the
10% and 0% rates on the first 15K or so), Joe will pay NO taxes.
correct?
So now later in the year, Joe wins the lottery and gets $40K in
earnings, the question is what will his taxes be:
25% of the lottery earnings and 0% on the LTCG,
15% of the lottery earnings, plus 15% on the LTCG, hence a
tax rate of 30% on the lottery earnings,
25% of the lottery earnings, and 15% on the LTCG, hence a
tax rate of 40% !!
or something else?
TJ

 

[kaneohe]

I believe your middle answer is the correct one. Think about the income as a bar w/ the LTCG stacked on TOP of the other income. The other income pushes the LTCG into the 15% LTCG bracket (bc the total income is in the 25% bracket). Then when the LTCG is stripped off the top, the tax on the other income is calculated separately at 15% because the other income is in the 15% bracket. As you note, this is greatly simplified bc of the ignoring the other tax brackets and deductions, exemptions but the concept is esp. useful if the LTCG themselves cause the LTCG part of the bar to straddle a tax bracket boundary and cover parts of 2 tax brackets.

 

[moperry]

Amt?

Forget about winning the lottery - would you have to pay the dreaded Alternative Minimum Tax if virtually all your 2008 income is from long term capital gains (which will have zero tax due in 2008, 2009, and 2010)?

 

[mb]

25% of the lottery earnings, and 15% on the LTCG, hence a
tax rate of 40% !!
or something else?
TJ

Don't know the answer to your question but I think there is an error in the above math.

The average tax rate (not incremental) for the above case is 20% not 40% as show below:

average tax rate = 100(.15(40)+.25(40))/80 = 20%



MB