Long term capital gains tax - effective tax is higher than 15%

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nyclon
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Long term capital gains tax - effective tax is higher than 15%

Post by nyclon » Mon Nov 13, 2017 10:57 am

Hi all - according to the long term capital gains table, at a federal bracket of 25-35%, the corresponding long term capital gains tax rate is 15%.

Using tax caster, if I add the long term capital gain cash amount, the tax due increases by a cash amount equivalent to 24% of the capital gain instead of 15%.

Can someone please shed some light? I am trying to earmark how much to allocate towards tax vs. actual gain.

Thank you in advance!

JW-Retired
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by JW-Retired » Mon Nov 13, 2017 11:09 am

Are you taking social security? That can grossly distort the apparent marginal tax on other income.
JW
Retired at Last

pshonore
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by pshonore » Mon Nov 13, 2017 11:13 am

In addition, the added income may reduce some credits based on AGI like Child Tax Credit, SLI and Education credit phaseouts, etc)

Boglegrappler
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by Boglegrappler » Mon Nov 13, 2017 11:13 am

Not sure why it wouldn't be accurate for your tax bracket, but the top gains rate for upper income tax payers is 20%, with the possibility of paying an additional 3.8% on net investment income, which comes out suspiciously close to your 24% rate on your calculator.

DSInvestor
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by DSInvestor » Mon Nov 13, 2017 11:19 am

You mentioned 35% tax bracket which implies high income. At higher levels of income (>200K single, 250K MFJ), additional taxes apply on investment income. Net Investment Income Tax (NIIT).
IRS FAQ on NIIT: https://www.irs.gov/newsroom/net-invest ... e-tax-faqs

If you itemize deductions, high income may result in reduction in the amount of itemized deductions you can take.
Fairmark page on Pease reduction in itemized deductions: http://fairmark.com/general-taxation/de ... eductions/
Wiki

nyclon
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by nyclon » Mon Nov 13, 2017 11:20 am

JW-Retired wrote:
Mon Nov 13, 2017 11:09 am
Are you taking social security? That can grossly distort the apparent marginal tax on other income.
JW
No, not taking SS.
pshonore wrote:
Mon Nov 13, 2017 11:13 am
In addition, the added income may reduce some credits based on AGI like Child Tax Credit, SLI and Education credit phaseouts, etc)
I'm quite certain other than the standard deductions, there are no other credit being applied.
Boglegrappler wrote:
Mon Nov 13, 2017 11:13 am
Not sure why it wouldn't be accurate for your tax bracket, but the top gains rate for upper income tax payers is 20%, with the possibility of paying an additional 3.8% on net investment income, which comes out suspiciously close to your 24% rate on your calculator.
Marginal bracket is closer to the 28-33% range.

nyclon
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by nyclon » Mon Nov 13, 2017 11:23 am

DSInvestor wrote:
Mon Nov 13, 2017 11:19 am
You mentioned 35% tax bracket which implies high income. At higher levels of income (>200K single, 250K MFJ), additional taxes apply on investment income. Net Investment Income Tax (NIIT).
IRS FAQ on NIIT: https://www.irs.gov/newsroom/net-invest ... e-tax-faqs

If you itemize deductions, high income may result in reduction in the amount of itemized deductions you can take.
Fairmark page on Pease reduction in itemized deductions: http://fairmark.com/general-taxation/de ... eductions/
Interesting, thank you for this. I will need to play with TT a bit - but it's possible that NIIT + AMT + some other items may be pushing 15% up? Although the spread is still very high between 15% and the actual additional taxes - this is surprising given all of the media hype about the LT capital gains tax as a loophole. Perhaps it only benefits the ultra high earners the most?

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Watty
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by Watty » Mon Nov 13, 2017 11:26 am

One other wild guess is that you could be in the income range where the deductibility of an IRA is being phased out.

If you have last year's tax software then it would be good to do a dummy tax return so that you can look at the details to see what changes and also figure out the effect on your state taxes. You can just make a copy of last years return and change the numbers as needed.

nyclon
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by nyclon » Mon Nov 13, 2017 11:31 am

Watty wrote:
Mon Nov 13, 2017 11:26 am
One other wild guess is that you could be in the income range where the deductibility of an IRA is being phased out.

If you have last year's tax software then it would be good to do a dummy tax return so that you can look at the details to see what changes and also figure out the effect on your state taxes. You can just make a copy of last years return and change the numbers as needed.
IRA deductibility was already phased out. Thank you for this suggestion - this is precisely what I'm planning to do using TT (turbotax).

I was just so surprised by the difference in what I thought would be assessed in tax vs actual - this board has a wealth of information on the topic.

On one had I'm wondering if I should see a CPA for this, and on the other, I'm thinking that the tax code is what it is (although I have plenty of friends who swear by their CPAs...)

cas
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by cas » Mon Nov 13, 2017 12:02 pm

nyclon wrote:
Mon Nov 13, 2017 11:23 am
I will need to play with TT a bit - but it's possible that NIIT + AMT + some other items may be pushing 15% up?
If you are paying AMT, that is quite possibly a big factor in the increased LTCG marginal rate. AMT and LTCG interact if you are within the AMT exemption phaseout, with the effect of adding either 6.5% or 7% to the marginal rate on the LTCG. See: "AMT and Long-Term Capital Gain"
http://fairmark.com/general-taxation/al ... ital-gain/

That doesn't get you quite all the way to 24%, but NIIT and/or interaction with some other phase-out (PEP/Pease?) might be in the mix too?

kaneohe
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by kaneohe » Mon Nov 13, 2017 12:08 pm

Is the LTCG a significant part of the income? Perhaps AMT is affecting you.

Katietsu
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by Katietsu » Mon Nov 13, 2017 12:19 pm

Are you taking into account that your AGI includes your capital gain amount and it is this AGI that must be used to determine tax bracket and NIIT?

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celia
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by celia » Mon Nov 13, 2017 12:58 pm

Why don't you print out the 1040 front and back from the projected 2017 return and compare it line-by-line to 2016?

The last dollar of last year's return may also have been taxed at a higher rate than you thought.

scrabbler1
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by scrabbler1 » Mon Nov 13, 2017 1:06 pm

Two things which increased the effective marginal tax rate on LTCG were: (a) it reduced the ACA premium subsidy, and (b) it reduced my deductible medical expenses because of the 10% threshold. My marginal rate on LTCG was 0%, but my tax bill rose significantly.

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Artsdoctor
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by Artsdoctor » Mon Nov 13, 2017 2:29 pm

nyclon wrote:
Mon Nov 13, 2017 11:23 am
DSInvestor wrote:
Mon Nov 13, 2017 11:19 am
You mentioned 35% tax bracket which implies high income. At higher levels of income (>200K single, 250K MFJ), additional taxes apply on investment income. Net Investment Income Tax (NIIT).
IRS FAQ on NIIT: https://www.irs.gov/newsroom/net-invest ... e-tax-faqs

If you itemize deductions, high income may result in reduction in the amount of itemized deductions you can take.
Fairmark page on Pease reduction in itemized deductions: http://fairmark.com/general-taxation/de ... eductions/
Interesting, thank you for this. I will need to play with TT a bit - but it's possible that NIIT + AMT + some other items may be pushing 15% up? Although the spread is still very high between 15% and the actual additional taxes - this is surprising given all of the media hype about the LT capital gains tax as a loophole. Perhaps it only benefits the ultra high earners the most?
You mentioned AMT and that's where your answer most likely lies.

The marginal income tax for high earners within the AMT ranges from 28% to 35%. It's entirely possible that your income is high enough to push you in the marginal capital gains rate of 20%. With the NIIT of 3.8%, you're now talking 23.8% marginal capital gains rate, which is presumably what you're describing in your calculations.

nyclon
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Re: Long term capital gains tax - effective tax is higher than 15%

Post by nyclon » Mon Nov 13, 2017 4:07 pm

Thank you to everyone who opined. You were on the right track.

I did some digging on TurboTax, and the additional tax amount is broken down this way, as a % of the capital gain:
15% = LTCG tax
6.5% = AMT
2.1% = NIIT

Total Debbie downer but I'm glad to have attributed it.

PS - I noticed in other hypothetical scenarios, with higher income levels, exemptions reduce which creates additional taxable income.

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