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3 questions re. subtleties in determining one's LT capital gains rate

I have 3 questions regarding the tax tables for capital gains. I just wanted to get a "bird's eye" view for tax planning purposes, so I wish to simplify the discussion as much as possible without getting into too much nitty gritty.

In the tax tables that I see on Wikipedia,

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the LTcapital gains tax is determined by the so-called "Ordinary Income Tax Rate". Elsewhere on Wikipedia,
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is a table ofmarginal tax rate vs. income.

1) My question is this: Is the "Ordinary Income Tax Rate" referred to in the former table the same as one's marginal tax rate referred to in the latter table?

2) Secondly, to determine one's marginal tax rate from the latter table, does one use one's earned income PLUS any capital gains, or without? I realize that regardless, the LT capital gains portion will not be taxed at the marginal rate. But for the purposes of looking up the marginal rate for one's earned income from this table, are capital gains included?

3) And a third question: It appears to me that for a given filer, a single tax rate is used on all of their LT capital gains. If this is true, then what of the filer who just bumps into a higher marginal tax bracket? If that puts the filer in a higher LT capital gains tax rate, does it mean that he pays a higher LT capital gains tax on ALL of his LT capital gains, and not just the "last dollars" of capital gains?

Regarding this last question, I'd like to think that our tax codes are generally very careful to only tax "later dollars" that enters into a higher bracket at the higher rate, while "earlier dollars" are taxed at the lower rate. But I haven't been able to find any discussion which explains if this is the case with respect to LT capital gains. Would appreciate any illumination on this matter.

Many thanks in advance. I tried to find answers to these question on the Internet, but have been unsuccessful finding a discussion on precisely this matter.

Reply to
cgfan
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To first order it's actually pretty simple (I'm ignoring gain on collectibles and unrecaptured Sec 1250 gains):

  • Take your taxable income.
  • Subtract all net long-term capital gains
  • Subtract all qualified dividends
  • Call that final number "ordinary taxable income" (my term)

Look at your filing status's tax table in the Form 1040 instructions.

If your ordinary taxable income puts you above the 15% bracket, then all your net LT gains and qualified dividends are taxed at

15%.

If your ordinary taxable income is in the 15% bracket or lower bracket, then the amount of LT gains and qualified dividends that takes you to the end of the 15% bracket is taxed at 0% and the rest is taxed at 15%. Here's an example with made-up numbers:

  • Pretend the 15% bracket ends at ,000.
  • You have ,000 of ordinary taxable income
  • You have ,000 of net LT gains and dividends

Then the first $7,000 ($30,000 - $23,000) of the LT gains and dividends will be taxed at 0% and the remaining $13,000 of it will be taxed at 15%.

Now for some complications... :)

Because net LT gains and qualified dividends count as gross income, they can reduce your eligibility for gross income-limited credits, can increase the amount of your SS benefits that are taxable, count when figuring itemized deduction AGI-based limitations and so on. The effect of those things can increase the actual, experienced marginal rate on LT gains and qualified dividends above the advertised rate of 15%.

Similarly, if you are subject to AMT and in the AMT exemption phaseout range, your actual, experienced marginal rate on LT gains and qualified dividends will be approximately 22% instead of the advertised 15%.

Reply to
Rich Carreiro

Why not just download the relevant forms from the IRS web site, fill them out with sample numbers, and get definitive answers?

Reply to
Barry Margolin

Good point.

During the election, we heard a lot about rich people paying low taxes because much of their income was in the form of LTCG. But shouldn't Romney and Buffett have been in AMT territory, so they don't actually pay such low CG rates?

Reply to
Barry Margolin

AMT uses maximum capital gains rates. Assuming that a large chunk of their income is in the form of qualified dividends, LTCG and muni bond interest.... the AMT is peanuts.

Reply to
Alan

Once they're out of the exemption phaseout range the marginal rate goes back to 15%.

The AMT exemption phases out at 25%. If you are in the phaseout range, $100 of AMT income (including LT gain) will thus reduce the exemption by $25. That thus allows $25 additional of ordinary income to be taxed at the 28% AMT rate. So:

Total additional tax = ($100 * 15%) [the LT gains] + ($25 * 28%) [additional ordinary income exposed to tax] = $15 + $7 = $22

Thus the marginal rate on LTCG when in the AMT exemption phaseout is

22%. But once the exemption is totally phased out, the next $100 doesn't cause any more ordinary income to be exposed and so the marginal rate reverts to 15%.
Reply to
Rich Carreiro

Wow, thank you both for your thoughtful answers, especially Rich's.

So I'll need to chew on your answer some more, but from the sound of it the answer's a lot more nuanced than I had ever imagined it might be. But more nuanced in a good way that seems "fair", if that term can ever be used regarding taxes, ha ha...

I cannot tell you how much I searched the internet for answer on this, and never have I found even something that even comes remotely close to discussing this very detail, let alone as clearly and succinctly as you have described.

So thank you. You've done me, and other readers, a great service!

Reply to
cgfan

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