If I visualize the process, does it work like this. I have a container of water representing ordinary income and a container of oil representing LTCG. There are 2 sets of smaller buckets. The 1st set contains 7 buckets each representing 1 ordinary tax bracket (10%, 12%, 22%, etc) with the size of the bucket being the amount between the thresholds. Similarly the 2nd set contains 3 buckets (0%, 15%, 20%) for LTCG. I can know how my income is exactly districted in these different buckets by filling up the buckets. First I remove the amount of water equal to standard deduction from my ordinary income container. If there are not more water left in the ordinary income container, I remove the remaining standard deduction amount from the LTCG container. If there is no water or oil left, I don't own any tax. If there is only oil left, I only own LTCG tax. If there is water left, I try to fill the ordinary income buckets one by one from low bracket to high. At the same time fill the matching LTCG buckets with water from somewhere else because the ordinary income will use up the matching LTCG buckets. Then I fill the remaining LTCG buckets with oil from the LTCG container starting with one partially filled with water. In the end, all buckets will be full except the last one water bucket and last one oil bucket. Each bucket tax amount is the volume of water or oil multiplied by the bucket rate but ignore the water in the oil buckets because they are used to subtract un-usable amount. Adding all of the tax amounts gives me my total tax. Does it sound right?
