does capital gains effect tax bracket?

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mx711yam
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does capital gains effect tax bracket?

Post by mx711yam » Wed Jan 29, 2014 10:03 am

Sorry if this has been answered I searched and couldn't find it. Do long term capital gains effect your tax bracket?

jebmke
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Re: does capital gains effect tax bracket?

Post by jebmke » Wed Jan 29, 2014 10:08 am

What happens when you add capital gains in Turbo tax or something like that (even taxcaster)?
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sscritic
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Re: does capital gains effect tax bracket?

Post by sscritic » Wed Jan 29, 2014 10:12 am

There was a thread from earlier this morning that you missed in your search. It has the title Long-term capital gains tax rate, which I would expect would have caught your attention given the nature of your enquiry.

http://www.bogleheads.org/forum/viewtop ... 0&t=131838

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mx711yam
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Re: does capital gains effect tax bracket?

Post by mx711yam » Wed Jan 29, 2014 10:16 am

That thread isn't asking what I'm asking.

My question is not how much tax I owe on the capital gains. I'm asking if the capital gains will move me from say the 25% tax bracket to the 28% or if it's not counted towards my earned income.

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Re: does capital gains effect tax bracket?

Post by sscritic » Wed Jan 29, 2014 10:21 am

mx711yam wrote:That thread isn't asking what I'm asking.

My question is not how much tax I owe on the capital gains. I'm asking if the capital gains will move me from say the 25% tax bracket to the 28% or if it's not counted towards my earned income.
I think it is. The real answer is in the link in this post.
http://www.bogleheads.org/forum/viewtop ... 5#p1941655

See line 27 of the linked file in the linked post. Change some numbers above line 27. See how line 27 changes.
27. Tax on all taxable income.

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Re: does capital gains effect tax bracket?

Post by sscritic » Wed Jan 29, 2014 10:40 am

Do you have tax software? If you have tax software, make a fake return and put yourself at the top of the 25% bracket (you must be close or you wouldn't ask the question the way you do). Add some long-term capital gains. Does your tax go up by 15% or 18%? If the extra capital gains caused some of your 25% income to become 28% income, you would see a 18% increase, 15% plus the extra 3%. I am not considering AMT in this exercise.

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Re: does capital gains effect tax bracket?

Post by Epsilon Delta » Wed Jan 29, 2014 10:53 am

mx711yam wrote:That thread isn't asking what I'm asking.

My question is not how much tax I owe on the capital gains. I'm asking if the capital gains will move me from say the 25% tax bracket to the 28% or if it's not counted towards my earned income.
Different people mean different things by "tax bracket". This makes the question hard to understand.

Some people mean does your taxable income go over the threshold in the tax rate schedule -- The answer to that is yes, capital gains are included in taxable income.

Some people mean does your marginal rate go to 28%. The answer is no, but marginal rate is also ill defined, since you can have different marginal rates for different types of income.

Tying tax bracket to earned income is a new one to me so I don't know quite what your asking.

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Re: does capital gains effect tax bracket?

Post by DSInvestor » Wed Jan 29, 2014 11:20 am

mx711yam wrote:That thread isn't asking what I'm asking.

My question is not how much tax I owe on the capital gains. I'm asking if the capital gains will move me from say the 25% tax bracket to the 28% or if it's not counted towards my earned income.
Capital gains income (both long term or short term) is included in your Adjusted Gross Income (AGI), Modified Adjusted Gross Income (MAGI) for various purposes, and Taxable Income (1040 line 43 ). As such, capital gains income in sufficient quantities can:
-can bump you up to higher tax brackets fed and state
-make you ineligible for Roth IRA contributions
-make you ineligible for Traditional IRA tax deduction (if you're covered by an employer plan)
-make you ineligible for certain tax credits
-make it more difficult to take medical tax deductions (>10% of AGI) and miscellaneous deductions
-make more social security benefits taxable

Short term capital gains is taxed as ordinary income. While Long Term Capital gains receives preferential tax treatment and is taxed at lower tax rates, it is counted as income to impact your overall tax situation. As others have posted, tax software and tax calculators can help you determine how capital gains will affect your tax situation.

We have a tricky tax system. Even tax exempt income can bump you up tax brackets (e.g. if it causes more social security benefits to be taxable).
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Re: does capital gains effect tax bracket?

Post by mx711yam » Wed Jan 29, 2014 12:23 pm

I didn't know it was so difficult to understand. Ok I will download that program and see what it shows. Thanks for the responses

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Re: does capital gains effect tax bracket?

Post by DSInvestor » Wed Jan 29, 2014 12:29 pm

mx711yam wrote:I didn't know it was so difficult to understand. Ok I will download that program and see what it shows. Thanks for the responses
Taxcaster is free and is available here. Enter your base tax situation, then add some long term capital gains. Then increase long term capital gains by $1000, noting the difference in tax. Increase your work income by $1000, note the difference in tax. Taxcaster will show you your Fed tax liability with each entry.
https://turbotax.intuit.com/tax-tools/
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Re: does capital gains effect tax bracket?

Post by kaneohe » Wed Jan 29, 2014 3:59 pm

I too don't know exactly what question you are asking but here is a simple-minded example:

1) Start w/ the opposite question........does ordinary income affect taxation of LTCG? Clearly it does. If you only have LTCG and it is in the 15% or lower "bracket",
the LTCG is taxed at 0%. If you add ordinary income , you can think of the ordinary income pushing the LTCG up into higher brackets so that it some of it (and eventually all of it) gets taxed at 15% (or higher if you push even further).
2) Then your (?) question....... does LTCG affect taxation of ordinary income. In normal simple cases, the tax on ordinary income is calculated by subtracting off the LTCG/QDIV first
and calculating tax on the ordinary income alone (after subtracting out adjustments, deductions,exemptions). You then add that to the LTCG which is calculated separately. So in these simple cases, the tax on ordinary income is not changed by
adding LTCG. However if you have credits/deductions/etc. that phase out w/ higher AGI, then LTCG can affect the total tax..........whether you attribute that to a change in the ordinary income tax or the LTCG tax is a matter of how you think about it.

You should study the wksht here referenced earlier by ssc http://apps.irs.gov/app/vita/content/gl ... _1040i.pdf
You will see the QDIV/LTCG subtracted from taxable income in line 7 and then the tax on that ordinary income calculated in line 24 . Note that the calculation on that ordinary
income only depends on that ordinary income but the taxation of QDIV/LTCG in the lines above depend on various other things.
Last edited by kaneohe on Wed Jan 29, 2014 8:26 pm, edited 2 times in total.

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Re: does capital gains effect tax bracket?

Post by Parthenon » Wed Jan 29, 2014 4:59 pm

mx711yam wrote:I didn't know it was so difficult to understand. Ok I will download that program and see what it shows. Thanks for the responses
There is also a free excel spreadsheet available at http://www.excel1040.com/ for your 2013 federal return.

Ed
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Re: does capital gains effect tax bracket?

Post by grabiner » Wed Jan 29, 2014 8:26 pm

Capital gains do not affect your tax bracket; if you are in the 28% tax bracket, you pay $280 of tax on an extra $1000 of non-CG taxable income, and that will not change if you add an extra $1000 of capital gains.

However, capital gains can affect your marginal tax rate, by causing some benefits to phase in or out. For example, if you are $1000 under the phase-in range for the child tax credit, $1000 of ordinary income adds $250 to your tax but leaves the child tax credit unchanged. $1000 of capital gains adds $150 to your tax but leaves the child tax credit unchanged, but if you now add $1000 of ordinary income, you owe $250 more in tax and also lose $50 of child tax credit, so your marginal tax rate went up from 25% to 30%.

As an example in the other direction, suppose you are in the 15% tax bracket and earning $10,000 of Social Security of which $7650 is taxed. $1000 of additional income would cause $850 of Social Security to be taxed as well, so your marginal tax rate on ordinary income is 27.75% (because you pay $150 on $1000 of income and $127.50 on the $850 of SS). If you have $1000 of capital gains, taxed at 0%, your marginal tax rate on those gains is 12.75% because they make $850 of SS taxable. However, your marginal tax rate then drops to 15% (and 0% on any further capital gains), because you have reached the maximum 85% of taxable SS.
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mx711yam
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Re: does capital gains effect tax bracket?

Post by mx711yam » Wed Jan 29, 2014 10:28 pm

Sorry for it being a noob topic I just haven't ever messed with capital gains. My concern is when I sell a rental property I will have about 20k after capital gains of 15% are paid. I'm just wondering if this 20k will count again as my income. Example, if my income for 2014 is 140k and I have 20k of LTCG, will my taxable income then be 160k and put us into the 28% bracket? Or is that 20k not looked at again since I have it as LTCG?

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Re: does capital gains effect tax bracket?

Post by DSInvestor » Wed Jan 29, 2014 10:41 pm

mx711yam wrote:Sorry for it being a noob topic I just haven't ever messed with capital gains. My concern is when I sell a rental property I will have about 20k after capital gains of 15% are paid. I'm just wondering if this 20k will count again as my income. Example, if my income for 2014 is 140k and I have 20k of LTCG, will my taxable income then be 160k and put us into the 28% bracket? Or is that 20k not looked at again since I have it as LTCG?
Do not consider 20K after 15% capital gains tax is paid. What is the size of the capital gain (sales proceeds minus cost basis)? The capital gain is added to income. The tax on the gain is determined after it has been added to income.

To see the effect of the capital gain on your tax liability, enter your entire tax situation (without capital gain) into tax software or tax calculator and find tax liability. This is your tax liability without realizing any capital gains. Now add the capital gain to the tax software and find your new tax liability. This will tell you how the capital gain impacted your taxes.

Also be careful when you talk about income and taxable income. These aren't the same. Let's call your job income, your salary. Further, lets's say that your gross salary (salary before 401k contributions, HSA etc) is 140K. You max out Traditional 40K for 17.5K each. This decreases your W2 income that shows up in your tax return's AGI. Taxable Income (1040 line 43) is AGI minus deductions and exemptions. Do you itemize deductions or take the standard deduction?

W-2 income= 140K - 35K = 95K
Long term Capital gain = gross proceeds - cost basis = 25K.
Adjusted Gross income (AGI) = 120K
Taxable Income = AGI - deductions (I'll assume standard deduction) and exemptions. 120K - 12400 - 3950 - 3950 = $99,700.
Last edited by DSInvestor on Wed Jan 29, 2014 10:50 pm, edited 1 time in total.
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Re: does capital gains effect tax bracket?

Post by MN Finance » Wed Jan 29, 2014 10:44 pm

mx711yam wrote:Sorry for it being a noob topic I just haven't ever messed with capital gains. My concern is when I sell a rental property I will have about 20k after capital gains of 15% are paid. I'm just wondering if this 20k will count again as my income. Example, if my income for 2014 is 140k and I have 20k of LTCG, will my taxable income then be 160k and put us into the 28% bracket? Or is that 20k not looked at again since I have it as LTCG?
It doesn't matter what your "bracket" is. Your 140 is taxed at income rates. The additional 20k is taxed at capital gains rates, which don't impact the tax you owe on your income. So based on the way you phrased the question, the gain has no impact on the taxes you owe on your income. Although really it's much more complicated than that. For ex, if you have 140k in income you may get a credit for something, of say 500. But if that credit phases out at 150k, then the capital gain made you lose it, so it increases the marginal rate of your capital gain. You may also have recapture issues with real estate which changes it more. You really do need to completely do your taxes in some software with/without the sale and measure the difference. Ps, having 20k left "after" you pay capital gains doesn't make sense (unless you're telling your spouse how much you have to blow on the next family vacation). The total gain is taxable, not just the 20k "left"

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Re: does capital gains effect tax bracket?

Post by grabiner » Wed Jan 29, 2014 10:49 pm

mx711yam wrote:Sorry for it being a noob topic I just haven't ever messed with capital gains. My concern is when I sell a rental property I will have about 20k after capital gains of 15% are paid. I'm just wondering if this 20k will count again as my income. Example, if my income for 2014 is 140k and I have 20k of LTCG, will my taxable income then be 160k and put us into the 28% bracket? Or is that 20k not looked at again since I have it as LTCG?
Your taxable income includes the capital gains; however, the capital gains are taxed at a different rate. Your ordinary income is taxed at the rates for ordinary income, so the first $18,150 is taxed at 10%, then income from $18,150 to $73,800 is taxed at 15%, and so on. These are the tax brackets.

Long-term capital gains are also taxed at a rate which depends on your tax bracket, but they are placed on top of your other income. Any capital-gain income in the 10% or 15% bracket is taxed at 0%, any in the 25%-35% bracket is taxed at 15%, and any in the 39.6% bracket is taxed at 20%. Thus, if your regular taxable income and your total taxable income including the capital gains is in the 25%-35% tax bracket, you will pay 15% of your capital gains in tax in addition to the tax on the regular taxable income (with some exceptions if you hit a phase-out of a tax benefit somewhere else, or for some other special cases such as gains on collectibles).

; then, any capital gains are taxed at 15% in most cases. The $20K capital gain will thus add $3K to your tax, unless it causes some other tax provision to phase out
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Re: does capital gains effect tax bracket?

Post by Kevin M » Wed Jan 29, 2014 11:01 pm

As others have said, it's best to use some tax software to run the numbers, since phase-outs of credits and deductions, etc., can affect your marginal tax rate. Taxcaster is OK, but may not handle more complex situations. You can use TurboTax online for free; you only have to pay to file, print, or view forms.

Don't forget state income taxes if you are in a state that has them. My state taxes capital gains as ordinary income, which has a significant effect on the overall marginal tax rate.

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Re: does capital gains effect tax bracket?

Post by plats » Wed Jan 29, 2014 11:32 pm

I agree tax software is useful but, I think understanding how taxes work is more important.

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Re: does capital gains effect tax bracket?

Post by DSInvestor » Thu Jan 30, 2014 12:11 am

plats wrote:I agree tax software is useful but, I think understanding how taxes work is more important.
Tax software is very helpful in gaining an understanding of how taxes work. Turbotax and Taxcaster has made a huge impact on my understanding of how taxes work at least for my limited tax situation.

Some folks think that breaking into a higher tax bracket causes all of their income to be taxed at a higher rate. Tax software and tax calculator will show in seconds that this is not true. Being able to see tax liability as you creep up the income is very illuminating.
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Re: does capital gains effect tax bracket?

Post by Kevin M » Thu Jan 30, 2014 2:20 am

^Exactly. It's "and/also", not "but/more". A combination of reading the IRS publications, using tax software, and looking at the forms as I work through the tax software is the way I've learned. This is why I like the desktop version of TurboTax more than the online version; you can quickly jump to the tax form that the answers to the interview questions are filling in.

However, when I want to know my effective marginal tax rate, the quickest way is to add or subtract $100 to/from my income, capital gains, or whatever, (using software) and see how much my tax changes. If I want to understand why it's changing that amount, I can drill down on the forms to see which numbers changed, and perhaps read the relevant sections of the relevant IRS pubs.

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