Capital Gains Tax Question

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Vanguard Fan 1367
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Capital Gains Tax Question

Post by Vanguard Fan 1367 » Sat Jan 27, 2018 6:06 am

My wife and I are having trouble with the capital gains tax. I say that if you have 100k in Long Term Capital gains that raises your income 100K and while you may pay the appropriate capital gains tax, say 20 percent, that 100k raises your income so that it may put you into the maximum 37 percent income tax rate.

Is there a tax book for dummies or someone on here who can simplify this so that idiots can understand it? It certainly puts a different spin on the 20 percent maximum capital gains tax if it then lifts your other income into a higher tax rate.

Thanks for any help. No one would argue that the United States Income Tax System is simple.

boridi
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Re: Capital Gains Tax Question

Post by boridi » Sat Jan 27, 2018 6:43 am

Make up several cases for amounts of earned income, long-term capital gains, and qualified dividends. Then run them through the Qualified Dividends and Capital Gains Worksheet - the worksheet where special tax rate is applied to long-term capital gains/qualified dividends

cas
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Re: Capital Gains Tax Question

Post by cas » Sat Jan 27, 2018 7:30 am

It certainly puts a different spin on the 20 percent maximum capital gains tax if it then lifts your other income into a higher tax rate.
LTCG and Qualified dividends don't lift your ordinary income into higher brackets. The LTCG/QDI "float on top" of the ordinary income.

As boridi pointed out, the two types of income (LTCG/QDI vs ordinary) are broken apart into two separate piles on the Qualified Dividends and Capital Gains Worksheet. Then the tax is calculated on the two piles separately. Then the two parts of the tax are added back together.

Unfortunately, the QD & CG worksheet is kind of long and takes a bit of concentration to see what it is doing. So...

For a quick graphical depiction, see: "Qualified Dividends Taxation Question" at viewtopic.php?f=10&t=86849#p1247382

For a longer explanation (especially scroll down to where the graphic charts discussing examples start) see this Michael Kitces article: "Mechanics Of The 0% Long-Term Capital Gains Tax Rate And Harvesting Capital Gains For A Free Step-Up In Basis!" at https://www.kitces.com/blog/understandi ... -in-basis/

(Yes, I know your question doesn't seem to fit into the title of that Kitces article, but some of the examples/graphical depictions *will* address your question, I think.)

kaneohe
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Re: Capital Gains Tax Question

Post by kaneohe » Sat Jan 27, 2018 9:17 am

and even when you think you understand, it is always good to put it thru tax software or a tax calculator like Taxcaster to confirm.

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Toons
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Re: Capital Gains Tax Question

Post by Toons » Sat Jan 27, 2018 9:41 am

"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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#Cruncher
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Re: Capital Gains Tax Question

Post by #Cruncher » Sat Jan 27, 2018 6:06 pm

cas wrote:
Sat Jan 27, 2018 7:30 am
LTCG and Qualified dividends don't lift your ordinary income into higher brackets. The LTCG/QDI "float on top" of the ordinary income
True. In addition to the graphical representations shown here by cas and here by Toons, here is a numerical illustration. It is for a 2017 joint return with the standard deduction and exemption for two people under age 65. The first column is for $70,800 of non-Social Security ordinary income. The second column adds $100,000 of long-term capital gains (LTCG).

Code: Select all

Rate: ord income bracket 1            10%    ----->
Rate: ord income bracket 2            15%    ----->
Rate: ord income bracket 3            25%    ----->
Rate: LTCG & QDI bracket 1             0%    ----->
Rate: LTCG & QDI bracket 2            15%    ----->
Floor: ord income bracket 2        18,650    ----->
Floor: ord income bracket 3        75,900    ----->
Floor: LTCG & QDI bracket 2        75,900    ----->
Non-SS Ordinary Income             70,800    70,800
LTCG & QDI                            -     100,000
Adjusted gross income              70,800   170,800
Deductions plus Exemptions         20,800    20,800
Taxable Income                     50,000   150,000

Code: Select all

LTCG & QDI Taxable                    -     100,000
Ordinary income taxable            50,000    50,000 <-- no change
Taxable: ord income bracket 3         -         -  
Taxable: ord income bracket 2      31,350    31,350 <-- no change
Taxable: ord income bracket 1      18,650    18,650 <-- no change
Taxable: LTCG & QDI bracket 2         -      74,100
Taxable: LTCG & QDI bracket 1         -      25,900
Tax: ord income bracket 3             -         -  
Tax: ord income bracket 2           4,703     4,703 <-- no change
Tax: ord income bracket 1           1,865     1,865 <-- no change
Tax: LTCG & QDI bracket 2             -      11,115
Tax: LTCG & QDI bracket 1             -           0
Total tax                           6,568    17,683
The taxable ordinary income remains at $50,000 and its resultant tax remains at $6,568 ($1,865 in 10% bracket plus $4,703) in 15% bracket after adding the LTCG. The $100,000 LTCG "sits on top of" the $50,000 ordinary income. Some of it ($25,900) falls in the 0% bracket and the remainder ($74,100) in the 15% bracket. (Figures prepared with the Compare sheet of my Marginal Tax Rates spreadsheet and confirmed with Taxcaster.)

PinotGris
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Re: Capital Gains Tax Question

Post by PinotGris » Sat Jan 27, 2018 8:16 pm

The capital gains can affect your MAGI income for Medicare tax.

Vanguard Fan 1367
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Re: Capital Gains Tax Question

Post by Vanguard Fan 1367 » Sun Jan 28, 2018 8:35 am

chabil wrote:
Sat Jan 27, 2018 8:16 pm
The capital gains can affect your MAGI income for Medicare tax.
Thanks. I will definitely have to deal with that tax.

gerntz
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Re: Capital Gains Tax Question

Post by gerntz » Sun Jan 28, 2018 8:55 am

chabil wrote:
Sat Jan 27, 2018 8:16 pm
The capital gains can affect your MAGI income for Medicare tax.
We're getting trapped on this for '17 due to MLP reorganizing & throwing off a bunch of unwanted LTCG.

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