Dumb question -LTCG like marginal or step function & bonus question

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TomatoTomahto
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Dumb question -LTCG like marginal or step function & bonus question

Post by TomatoTomahto » Thu Oct 05, 2017 4:09 pm

I should know this, but I don't. We are well into the max tax rates, but our son isn't, and I'm trying to answer a question for him.

He interned this summer, and made an amount of money that will leave him a small bit of room to harvest some gains at 0% LTCG. Question: if he calculates his income incorrectly, say for example by $1, do his taxes rise by $0.15 (marginal rate of 15% only on the $1 over the line) or do his taxes rise by something much higher (i.e., the entire LTCG is taxed at 15%)? The problem, of course, is that one doesn't always know one's income precisely in 2017 before getting tax forms in 2018. Students, as he is, sometimes get income reported as earned income, sometimes as stipends, seemingly decided randomly.

I know I could run some samples in Taxcaster, but . . .

Thanks in advance. So, is it marginal (15% on the amount over the limit) or step function (once you go over the limit, the entire LTCG is taxed at 15%).

And, since you're here, any opinions on whether the monetary prize for a paper can be offset by the cost of the conference at which the paper is presented? Seems only fair to me, but I'm not an accountant. I assume that travel expenses to the conference are not deductible, but is the registration fee?

DSInvestor
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Re: Dumb question -LTCG like marginal or step function & bonus question

Post by DSInvestor » Thu Oct 05, 2017 4:16 pm

Seems like a good exercise for your son to run through with tax calculators. Taxcaster has been updated to make it cumbersome to run quick tax scenarios. HRBlock has one that is a little more streamlined. https://www.hrblock.com/get-answers/tax ... e/aboutYou

Note that even if Fed taxes LTCG/QDI at 0% tax rate, your state will likely treat it as ordinary income.

kaneohe
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Re: Dumb question -LTCG like marginal or step function & bonus question

Post by kaneohe » Thu Oct 05, 2017 4:27 pm

viewtopic.php?t=86849

see the stacked bar chart by tfb on the 12/11/11 post for a graphical way of thinking about this ..........
and then post the answer to your question.

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TomatoTomahto
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Re: Dumb question -LTCG like marginal or step function & bonus question

Post by TomatoTomahto » Thu Oct 05, 2017 4:29 pm

Yes. I pointed him at Taxcaster, but ran it myself and realized that the “what if” functionality had been removed.

I’ll mention HRBlock.

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TomatoTomahto
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Re: Dumb question -LTCG like marginal or step function & bonus question

Post by TomatoTomahto » Thu Oct 05, 2017 4:39 pm

kaneohe wrote:
Thu Oct 05, 2017 4:27 pm
viewtopic.php?t=86849
see the stacked bar chart by tfb on the 12/11/11 post for a graphical way of thinking about this ..........
and then post the answer to your question.
Thanks. First I looked at the 12/10/11 graphical representation, which didn't tell me a thing, but then I scrolled down to 12/11/11 and voila, it's treated marginally. That will be a relief to him, in case he miscalculates his income for the year.


No takers for the bonus question?

JBTX
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Re: Dumb question -LTCG like marginal or step function & bonus question

Post by JBTX » Thu Oct 05, 2017 5:21 pm

TomatoTomahto wrote:
Thu Oct 05, 2017 4:39 pm
kaneohe wrote:
Thu Oct 05, 2017 4:27 pm
viewtopic.php?t=86849
see the stacked bar chart by tfb on the 12/11/11 post for a graphical way of thinking about this ..........
and then post the answer to your question.
Thanks. First I looked at the 12/10/11 graphical representation, which didn't tell me a thing, but then I scrolled down to 12/11/11 and voila, it's treated marginally. That will be a relief to him, in case he miscalculates his income for the year.


No takers for the bonus question?
If you don't file a schedule C, the income would probably be miscellaneous income and expenses would probably be miscellaneous expenses subject to 2% of AGI threashold.

If you filed a schedule C and treated this venture as a business you could claim the income and also all the expenses as business expenses. Any remaining income will be subject to income and Both employer and employee FICA. whether that is a legit use of a schedule c I don't know for sure.

PS given you are in highest tax rate you have likely exceeded your FICA limit so you won't have any additional FICA liability. Also how much prize income are we talking about here? For a few hundred dollars I wouldn't bother. Filling out a schedule C marginally increases your likelihood of audit. If you are talking about thousands then it is probably worth it.

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Matahari
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Re: Dumb question -LTCG like marginal or step function & bonus question

Post by Matahari » Thu Oct 05, 2017 8:39 pm

In case you haven't considered this issue: if your son is a full-time student, under age 24 and has unearned income in excess of $2,100, part of that unearned income may be subject to the kiddie tax (i.e., taxed at your rate instead of his tax rate).

Unearned income would, of course, include interest, dividends and capital gains.

If, however, your son's earned income exceeds 1/2 of his own support for the year, then he would be free of the kiddie tax.

https://www.irs.gov/taxtopics/tc553

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TomatoTomahto
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Re: Dumb question -LTCG like marginal or step function & bonus question

Post by TomatoTomahto » Fri Oct 06, 2017 6:25 am

Matahari wrote:
Thu Oct 05, 2017 8:39 pm
In case you haven't considered this issue: if your son is a full-time student, under age 24 and has unearned income in excess of $2,100, part of that unearned income may be subject to the kiddie tax (i.e., taxed at your rate instead of his tax rate).

Unearned income would, of course, include interest, dividends and capital gains.

If, however, your son's earned income exceeds 1/2 of his own support for the year, then he would be free of the kiddie tax.

https://www.irs.gov/taxtopics/tc553
Yes, we (and our accountant) have considered this issue. Thanks to the "STEM love" of employers, he has the good fortune to have earned income that exceeds 1/2 of his support in 2016 and 2017. We have "matched" part of his earnings, but below the $28k gift tax limit.

kaneohe
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Re: Dumb question -LTCG like marginal or step function & bonus question

Post by kaneohe » Fri Oct 06, 2017 8:38 am

TomatoTomahto wrote:
Thu Oct 05, 2017 4:39 pm
kaneohe wrote:
Thu Oct 05, 2017 4:27 pm
viewtopic.php?t=86849
see the stacked bar chart by tfb on the 12/11/11 post for a graphical way of thinking about this ..........
and then post the answer to your question.
Thanks. First I looked at the 12/10/11 graphical representation, which didn't tell me a thing, but then I scrolled down to 12/11/11 and voila, it's treated marginally. That will be a relief to him, in case he miscalculates his income for the year.


No takers for the bonus question?
A+ on the homework assignment! :sharebeer

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