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

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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snipped-for-privacy@comcast.net wrote:

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.

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On 3/5/13 11:19 AM, Barry Margolin wrote:

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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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.

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On 3/5/13 12:18 AM, snipped-for-privacy@comcast.net wrote:

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.

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.

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Alan
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