cancel
Showing results for 
Search instead for 
Did you mean: 
     
Highlighted
Contributor ○

long term capital gains tax

I understand that  LTCG have 3 tax brackets, depending on total income. I have found a couple online capital gains tax calculators that show that capital gains tax is not progressive. In other words when you cross an income threshold, the entire amount of capital gains is taxed at the next higher rate rather than proportionally based on the % over the threshold. Is this true? Our tax system is gradual in all other cases that I know of. Eg, If you have $10000 in capital gains and total income is $39,375 (including the 10K), there is no capital gains tax. Income $39,376 and the entire $10000 is taxed at 15%. ?

0 Kudos
6 Replies
Highlighted
Frequent Contributor

Re: long term capital gains tax

Say the income threshold for 15%is $40000. You have an earned income of $38,000 and sold a stock you held for more than a year for $5,000 profit. Then you would be paying 0% tax on $2,000 and 15% tax on $3,000.

0 Kudos
Highlighted
Contributor ○○○

Re: long term capital gains tax

"In other words when you cross an income threshold, the entire amount of capital gains is taxed at the next higher rate rather than proportionally based on the % over the threshold. Is this true? "

Net Long Term Capital Gains (LTCG), will stack on top of your household's ordinary income. An example will be easiest to show this.

tax on ltcg.jpg

So in words, you add up your ordinary income, from this total subtract your standard deduction (or itemized if larger). This is your taxable ordinary income. On top of this stack the total of net (gross LTCG minus any LT Cap Losses) LTCG + Qualified Dividends (both of these are taxed at exactly the same rate so they can be added together for the tax calculation). Then draw a horizontal line at $80,000 (married filing jointly) or $40,000 (filing single). Any LTCG + QD that fall below this line are taxed at 0%, Any above this line up to $496,600 MFJ or $441,450 Single, will be taxed at 15%. Above this taxed at 20%. And keep in mind, if your Adjusted Gross Income is over $250,000 MFJ or $200,000 S, there will be an added Net Investment Income Tax, or NIIT, of 3.8% on the lesser of the amount of investment income or AGI exceeding these amounts.

Hope that helps

BruceM

Highlighted
Contributor ○

Re: long term capital gains tax

Thanks Bruce and Fatcat. So it is graduated, just not in the way I assumed. In calculating all income sources, ordinary income is first, and LTCG is then added and taxed based on the portion above $40K (for single filer). 

0 Kudos
Highlighted
Frequent Contributor

Re: long term capital gains tax


@archer wrote:

Thanks Bruce and Fatcat. So it is graduated, just not in the way I assumed. In calculating all income sources, ordinary income is first, and LTCG is then added and taxed based on the portion above $40K (for single filer). 


There is a hidden double tax penalty when cap gains/qualified dividends become subject to taxation. For example assume In 2020 a married couple has 60k of taxable ordinary income fromSS and investments and 20k of cap gains which results in cap gains being taxed at the 0 bracket because total taxable income does not exceed the 80k limit for 0 tax on cap gains. Ignoring an inflation increase On the 80k limit in 2021, assume that taxable income increases to 100k Because 20k in RMDs commence. The 20k increase results in 2 separate but related tax increases: The 20k RMDs are taxed at 12%  which results in a $2400 tax increase and 20K of cap gains/qualified dividends are now taxed at 15% because taxable income is 20k over the 80k limit for 0 tax rate on cap gains which adds another $3000 of income tax for a total tax increase of $5400 or 27% on the 20k increase in income.

Highlighted
Contributor ○○○

Re: long term capital gains tax

@archerYes.

Here's a stacked bar graph that might  make seeing this a little bit easier.

The first stacked bar shows ordinary income with LTCG + QD stacked on top and for completeness, untaxed income stacked on top of that (muni bond interest, return of capital, untaxed SS, etc).

stacked bar tax.jpg

Now, pull the 27,400 standard deduction out of the ordinary income bar and the bar will 'clunk' down, looking like this

stacked bar tax 2.jpg

Notice the line at $80,000. That part of the LTCG + QD below the line is taxed at 0$, while that above the line is taxed at 15%

Now to @Intruder 's comment. If you add, say, $100 of ordinary income, that will stack on top of the existing ordinary income and will be taxed at 12%. However, it will also 'lift' $100 up above the $80,000 line, raising the tax on that $100 from 0% to 15%, hence the marginal tax rate on each dollar added to the above income will be 12% + 15% = 27%, and will remain so until all of the LTCG + QD are 'lifted' up above the $80,000 line, at which point each added dollar of ordinary income will be taxed at 22% up to that cap and then 24% above that, etc, etc

A picture can often make a concept much easier to 'see'

BruceM

Highlighted
Contributor ○

Re: long term capital gains tax

Yes! A picture is worth a thousand words. :-)

 

0 Kudos
Announcements