How are Long Term Capital Gains taxed relative to regular income?

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Hey there tax community. I am really having a mental road block attempting to
figure out how Long Term Capital Gains (LTCG) are taxed at 15%.

Here is mental block. It appears that once LTCGains are identified, the gain is
added back into Form 1040 (line 13) from Schedule D and increases the adjusted
gross income.

Thus, as part of the adjusted gross income, the tax rate of the capital gain is
that of your income tax bracket, not the 15% long term rate that I hear everyone
talking about.

I am sure I am missing something here. If someone could help that would be
great.

TL;DR - How is the Long Term Capital Gain rate taxed at 15% if it is added and
included in the adjusted gross income?

Thanks.

PDXGalt

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Re: How are Long Term Capital Gains taxed relative to regular income?


If you go through the entire Schedule D, you'll see that it instructs  
you to fill out worksheets that adjust for this.  They involve  
subtracting the LTCG from your AGI, calculating the CG tax, and then  
adding this back in to the tax.

Yes, it's backwards. I think it's done this way is because different  
situations involve different adjustment worksheets.  It may also make  
calculating AMT easier.

--  
Barry Margolin
Arlington, MA

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Re: How are Long Term Capital Gains taxed relative to regular income?


And it speaks to how convoluted the tax forms are. OP can use tax  
software of his choice, and tinker with the numbers. He'll see that  
$1000 more in LT gain produces $150 more tax. Except if he's in AMT  
land, which can change net tax by $225 or so even while in the '15% LT  
gain' income level.

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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used,   >>
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<<   The Charter and the Guidelines for submitting posts   >>
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Re: How are Long Term Capital Gains taxed relative to regular income?


Not necessarily true, and he does NOT need to be in AMT
for it not to be true.

Examples:
* He collects SS.  An additional $1000 of LT gain could
  make as much as an additional $850 of SS become taxable,
  so he'd pay $150 on the LTCG and (assuming 25% bracket)
  $213 on the SS.  So that additional $1000 of LTCG would
  actually produce $363 more tax (that's right -- an  
  effective 36.3% marginal rate).
* He itemizes and has medical deductions.  $1000 of LTCG
  will reduce his allowable medical deductions by $75.
  So $150 tax on the LTCG and (again assuming 25% bracket)
  the lost deduction will produce $19 of tax.  So the additional
  $1000 of LTCG will produce $169 more tax.
* You get the idea.

--  
Rich Carreiro                            rlc-news@rlcarr.com

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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used,   >>
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Re: How are Long Term Capital Gains taxed relative to regular income?

figure out how Long Term Capital Gains (LTCG) are taxed at 15%.

is added back into Form 1040 (line 13) from Schedule D and increases the
adjusted gross income.


is that of your income tax bracket, not the 15% long term rate that I hear
everyone talking about.


great.

included in the adjusted gross income?

Taxes are computed on Taxable Income (TI), not AGI. As long as your TI  
is equal to or less than the upper limit of the 15% tax bracket, your  
LTCG/QualDiv will not be taxed. Once your TI starts to exceed the upper  
limit of the 15% tax bracket, it starts to drag the 0% taxed gains into  
the 15% CG tax until the amount of TI less LTCG = the upper limit of the  
15% bracket. Then, all the LTCG get taxed at 15%.  Here are some  
examples. For simplicity, assume that there is no 10% ordinary tax  
bracket, the upper limit for filing MFJ is $70,700 before you hit the  
25% tax bracket and there are only LTCG.

TI = $70,700 and LTCG within that amount is $20,000.
Your tax is $20,000 x 0% CGRate + $50,700 x 15% OrdRate.

TI = $90,700 and LTCG within that amount is $20,000.
Your tax is $20,000 x 15% CGRate + $70,700 x 15% OrdRate.

TI = $80,700 and LTCG within that amount is $20,000.
Your tax is $10,000 x 0% CGRate + $10,000 x 15% CGRate + $60,700 x 15%  
OrdRate.

TI = $100,700 and LTCG within that amount is $20,000.
Your tax is $20,000 x 15% CGrate + $70,700 x 15% OrdRate + $10,000 x 25%  
OrdRate.

See The Schedule D Tax Worksheet.

--  
Alan
http://taxtopics.net  

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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used,   >>
<< nor can it used, for the purpose of avoiding penalties  >>
<< that may be imposed upon the taxpayer.                  >>
<<                                                         >>
<<   The Charter and the Guidelines for submitting posts   >>
<<  to this newsgroup as well as our anti-spamming policy  >>
<<                  are at www.asktax.org.                 >>
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