Is Capital Gains based on AGI? Is it bracketed like Income Tax?

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MikeT
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Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 10:04 am

1. Do you pay 0% long term capital gains tax if your income is $37,649 but 15% if your income is $37,651?
2. Is the long term capital gains tax rate based on AGI or Gross Income?
3. For a retired friend of mine, would it be her social security + proceeds from stock sale less deductions?

Image

Thanks a bunch,
Mike

jshanley002
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by jshanley002 » Thu Apr 06, 2017 10:37 am

Hi Mike,

Capital Gains are based on taxable income (line 43 on 1040). Taxable income is your AGI minus deductions (either itemized or standard) and personal exemptions.

If your taxable income is below $37,650 (for filing single) then your capital gains would be 0%. As you have income that pushes you up above $37k, the amount of capital gains above $37k is taxed at 15%.

I am over simplifying a bit.
Michael Kitces had a really good article on this a while back: https://www.kitces.com/blog/understandi ... -in-basis/

John S

DSInvestor
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by DSInvestor » Thu Apr 06, 2017 10:42 am

Tax brackets are based on Taxable Income (line 43 on 1040 form).
Taxable Income = AGI - deductions - exemptions.

The portion of Long Term Capital Gains (LTCG) and Qualified Dividend Income (QDI) that falls in the 15% bracket and below is taxed at 0% Fed. The portion that falls in the 25% or higher is taxed at 15%. If your state has a state income tax, it will likely tax LTCG and QDI as ordinary income even if Fed taxes it at 0%.

The higher AGI with net capital gains can cause more social security to be taxable which may increase AGI and Taxable Income. If you are receiving an ACA Premium Tax Credit, run your numbers carefully as the higher AGI with LTCG may cause you to lose a valuable tax credit.

I suggest running some numbers with tax calculators to see how things work.
HRBLock Tax Calculator: https://www.hrblock.com/get-answers/tax ... ators.html
TaxAct Tax Calculator: https://www.taxact.com/tools/tax-calculator.asp
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MikeT
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 11:00 am

DSInvestor wrote:
The portion of Long Term Capital Gains (LTCG) and Qualified Dividend Income (QDI) that falls in the 15% bracket and below is taxed at 0% Fed. The portion that falls in the 25% or higher is taxed at 15%.
Thanks @DSInvestor

Let's say regular income is $37,649 and there's $10,000 proceeds from a stock sale.

Which is it:
1) The $10,000 long term proceeds is "marginal" income and thus taxed at 15%
or
2) First count the $10,000 proceeds so it's taxed at zero% (but then $10k of the $37k would be in the next tax bracket for income tax purposes?

Thanks for clarifying,
Mike

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House Blend
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by House Blend » Thu Apr 06, 2017 11:33 am

MikeT wrote: Let's say regular income is $37,649 and there's $10,000 proceeds from a stock sale.

Which is it:
1) The $10,000 long term proceeds is "marginal" income and thus taxed at 15%
or
2) First count the $10,000 proceeds so it's taxed at zero% (but then $10k of the $37k would be in the next tax bracket for income tax purposes?
Best not to use a term like "regular" income, and instead stick with the terms used on the Form 1040.

Maybe this example will clarify, using 2016 brackets:
Single taxpayer.
One personal exemption.
Standard deduction.
Box 1 on the W-2 shows $40,000.
Long term cap gains of $10,000 from a sale of stock.
No other income.

$50,000 = Adjusted Gross Income.
-$4,050 = personal exemption
-$6,300 = standard deduction
-----------------------------
$39,650 = Taxable Income.

The tax computation goes like this:
Subtract the $10,000 LT gains from the Taxable Income: $29,650
You owe ordinary income tax on that; look it up in the tax tables.

Now compare with the top of the 15% bracket: $37,650.
Your Taxable Income is $2,000 above that.
So: $2,000 of your gains are taxed @ 15%, and $8,000 is taxed @ 0%.

MikeT
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 11:39 am

Thank you so much @House Blend , that is VERY helpful.

Regards,
Mike

DSInvestor
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by DSInvestor » Thu Apr 06, 2017 12:32 pm

MikeT, you mention proceeds. Notice that HouseBlend's answer mentions capital gain. If you sell $10,000 worth of stock, you have $10,000 proceeds but that's not your capital gain.

Capital Gain = Gross proceeds - cost basis
Cost Basis = purchase cost + reinvestments.

If you bought a $8000 worth of stock and reinvested $500 of dividends over the years. You cost basis is $8500. If you sell all of that stock for $10,000, your capital gain is $1,500.

If you're selling some of your shares, you may be able to use specific share identification to sell the shares with the highest cost basis which would give you smaller capital gains and maybe even a capital loss.
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MikeT
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 12:42 pm

Thanks @DSInvestor ; I didn't catch that, good point.

Ultimately, I'll be putting all the data into H&R tax software and it will tell me the correct answer.

The reason I asked the question is an elderly friend got a 1099-B from Wells Fargo Advisors reporting proceeds of $15,000 with a cost basis of ZERO !!!

Her income is VERY low (basically social security); her AGI is $35,000

I was trying to figure out if it was worth the hassle of trying to contact Wells to see if the basis was really ZERO.

Even if it wasn't, I wasn't very anxious to file with a different 1099 value (let's say they told me the correct # on the phone). The last thing I want to do is trigger an audit flag or letter from the IRS complaining that the values didn't match.

_Mike

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BL
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by BL » Thu Apr 06, 2017 12:54 pm

Covered shares are shares purchased on or after January 1, 2012. Tax Form 1099-B will provide cost basis information for covered shares to both the shareholder and the IRS. Non-covered shares are shares purchased by a shareholder on or before December 31, 2011.
Were the shares purchased before 2012 (before 2011, I believe, for a share of stock)? Then they would not report it to IRS and you could figure it out yourself. The default is 0 basis, if you can't make a good-enough effort to figure it out. If she has no income besides SS, there may be no tax even at basis of 0.
Her income is VERY low (basically social security); her AGI is $35,000
How did you come up with AGI? Does it include all SS? SS could be included in AGI in amounts from 0 to 85% of distribution. It all depends on what other income is included in the AGI. The tax program should take care of that.
Last edited by BL on Thu Apr 06, 2017 1:03 pm, edited 1 time in total.

livesoft
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by livesoft » Thu Apr 06, 2017 1:02 pm

MikeT wrote:The reason I asked the question is an elderly friend got a 1099-B from Wells Fargo Advisors reporting proceeds of $15,000 with a cost basis of ZERO !!!
I'm surprised by the above statement. For my accounts, WellsFargo has always reported the correct cost basis even for non-covered shares and even for non-covered shares transferred in from other brokers. Now "reported" does NOT mean that the cost basis was reported to the IRS on a 1099-B. For non-covered shares, the cost basis -- even if known -- will NOT be reported to the IRS and the IRS instructions give one explicit instructions on what to do in that case.

So what do I mean by the above paragraph. I mean the cost basis was readily available on the 1099-B, but if the 1099-B was imported into tax software, the cost basis for non-covered shares was not imported. Of course, that doesn't mean MY 1099-Bs reflect what has happened to the 1099-B of the elderly friend.

At some point, one should read the IRS instructions and not try to learn how to do taxes from social media.
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MikeT
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 6:00 pm

Thanks @BL.

The stock was acquired in 2003 and sold in 2016. There is no practical way I can find the basis. I believe it was originally at Smith Barney, then went to Wells Advisors, then got shunted off to another Wells broker when the assets under management fell to just the $7k annuity.

I just finished the program and it calculated
Income = $35,980
AGI: $35,879
Less deductions $7850
Less Exemption $4050
=
Taxable Income $23,979
Tax Due $747

So, the above takes into account SS and the $15k stock sale proceed with a basis of zero.

-Mike

livesoft
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by livesoft » Thu Apr 06, 2017 6:08 pm

What was the lowest possible purchase price of the stock in 2003? Are there tax returns from 2003, 2004, 2005 with the paid dividends noted? From the amount of the dividends, one could tell about the number of shares purchased each year. That is, if one knew the ticker symbol and could look up the historical record of dividend payouts for all those years. It's only a little bit of forensics to try.
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MikeT
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 6:15 pm

Thanks @livesoft.

No 1099's were imported into tax software: I hand entered them.

And now that I know what non-covered shares mean, I see that since it was acquired in 2003, it would NOT be reported to the IRS.

As I'm doing some googling on this, it appears I can use morningstar and look at the share price back in 2003.

WOW! PCM Fund Inc. CUSIP 69323T101
It was $12 in 2003. Now it is $10:
http://quotes.morningstar.com/chart/cef ... ture=en_US

Is it safe for me to go back in the tax program and correct the basis to be $18k on the $15k proceeds? (I didn't efile or mail in the return yet).

This thread may have saved the day !!!

-Mike

MikeT
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 6:20 pm

I just read the post you were typing (as I was typing) @Livesoft.

Good point: She owned 1543 shares when she sold it last year. Due to dividend reinvestment, she obviously purchased fewer shares back in 2003.

Is there any online tool where you can reverse dividends back to original shares purchased?

If not, is it reasonable to estimate maybe $10k basis (which I think is very low if you look at the stock chart from 2003-last year)
http://quotes.morningstar.com/chart/cef ... ture=en_US

-Mike

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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by livesoft » Thu Apr 06, 2017 6:22 pm

Not safe yet. Suppose there were some stock splits along the way and some other things that would affect price. I think you need to do some more research. This is where all the tax returns from 2003 to 2015 might be helpful.
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by delamer » Thu Apr 06, 2017 6:23 pm

MikeT wrote:Thanks @livesoft.

No 1099's were imported into tax software: I hand entered them.

And now that I know what non-covered shares mean, I see that since it was acquired in 2003, it would NOT be reported to the IRS.

As I'm doing some googling on this, it appears I can use morningstar and look at the share price back in 2003.

WOW! PCM Fund Inc. CUSIP 69323T101
It was $12 in 2003. Now it is $10:
http://quotes.morningstar.com/chart/cef ... ture=en_US

Is it safe for me to go back in the tax program and correct the basis to be $18k on the $15k proceeds? (I didn't efile or mail in the return yet).

This thread may have saved the day !!!

-Mike
Yes, you can correct the cost basis.

MikeT
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 6:25 pm

Sorry, I should have said:

Since the basis of a 2003 stock sale was not reported to the IRA, if I estimate the basis, is that safe (assuming she doesn't get audited).

She's 92 with low income and I think the audit risk is low.

-Mike

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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by livesoft » Thu Apr 06, 2017 6:26 pm

Also were additional shares bought with the apparently monthly dividends?

If she only bought shares once in 2003 and she is audited, then I don't see any issues.
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MikeT
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Thu Apr 06, 2017 6:36 pm

Maybe this is a generational thing:

I just called her to ask how far back in time her financial/tax folders go.

She said: 25 years :-)

I toss everything older than 7 :-)

I asked her to dig out July of 2003 (Wells Fargo or Smith Barney).

She just called back to say it's in her storage locker.

I may go over there this weekend to see if I can find the info.

-Mike

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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by ruud » Thu Apr 06, 2017 8:07 pm

If you compare the following 2 scenarios in your tax software:
* all income, including the stock sale with a basis of 0
* all income, but don't include the stock sale at all (i.e. don't enter the 1099 in the tax software)
What is the difference in tax liability? If the number is small enough, is it worth tracking down the exact basis?
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House Blend
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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by House Blend » Fri Apr 07, 2017 10:52 am

MikeT wrote:The stock was acquired in 2003 and sold in 2016. There is no practical way I can find the basis. I believe it was originally at Smith Barney, then went to Wells Advisors, then got shunted off to another Wells broker when the assets under management fell to just the $7k annuity.

I just finished the program and it calculated
Income = $35,980
AGI: $35,879
Less deductions $7850
Less Exemption $4050
=
Taxable Income $23,979
Tax Due $747

So, the above takes into account SS and the $15k stock sale proceed with a basis of zero.
OK. In case it wasn't clear from the ensuing discussion, the fact that she's currently paying 0% on the gains, even if you assume the cost basis is 0, puts an upper bound on any improvements in tax she can hope to achieve.

And those improvements can come in two ways:
1. By finding documentation that supports a nonzero cost basis, you'll lower the capital gain reported on page 1 of the 1040. In turn, this should lower the *taxable* part of her SS income,
and hence lower her AGI, taxable income, and tax due.

2. If you can find documentation supporting a cost basis greater than $15K, then the capital gain disappears and becomes a capital loss. Each dollar of capital loss (up to $3000) saves her 10% or 15% on tax due, in addition to the indirect effects of #1. However, you can't do better than a tax bill of 0, so you may reach the point of diminishing returns before this happens.

Depending on how much your time is worth, an easy middle ground is to simply find out how much she paid for the investment in 2003 and go with that. Dividend reinvestments over the
years could increase that basis, but will be more labor intensive to uncover.

Example:
$15,000 of pension or RMD income
$10,000 of SS income
$15,000 of LT cap gains (assuming basis of 0).

Under the rules for SS taxation, $5,350 of her SS income would be taxable, giving her an AGI of $35,350.

Now suppose you discover that she paid $10,000 in 2003 for the shares. That shrinks the capital gain down to $5,000, and now her SS is completely untaxable. In effect you have decreased her tax bill by 10% of $5,350. (If her taxable income is $23,979 with $15,000 of LT cap gains, then making $1 of SS untaxable saves $0.10.)

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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by TBillT » Fri Apr 07, 2017 12:00 pm

I've been playing the long term gains game too, keeping other income low to allow very low tax rates. I use Turbo Tax to do the planning.

Things to watch out for are keeping below Medicare $250K AGI and possibly also your Medicare premium are higher over a certain income. Joint filers have better (higher) limits on everything, so that helps.

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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Fri Apr 07, 2017 2:03 pm

Thanks everyone.

I did some what-ifs in the H&R block software.

The total stock sale proceeds were $31k of which $15k had a zero basis.

When I set the basis to $28k on the $31k proceeds, the federal tax due dropped from about $750 to zero.

The AGI dropped to $15,969
Taxable like $2,500

When I set the basis as $18k on $31k,
AGI became $30,145
Taxable became $18k

So, I will go over there and hunt through her storage cage to see if I can find it.

-Mike

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Re: Is Capital Gains based on AGI? Is it bracketed like Income Tax?

Post by MikeT » Fri Apr 07, 2017 2:10 pm

$12,000 for 13 years at 2% (assuming that's the dividend), would grow to $15,523

What percentage in dividends are common for a high dividend paying fund?
What percentage in dividends is common for a low dividend fund? (of course, it could be zero).

In case I can't find the actual, if we were going to guess, I think the basis is closer to $12k or $14k, not zero.

-Mike

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