Capital gains tax brkt vs tax rate

[MEIGSX2]

Is my tax bracket based on gross income before, or after 401k benefits are taken out of my paycheck? What about adjusted gross income? Trying to get into the 15% ordinary income tax rate so as to not pay capital gains on a real estate sale. John

[Lisa995]

"Is my tax bracket based on gross income before, or after 401k benefits are taken out of my paycheck?"

Adjusted gross income includes the amount in Box 1 of your W2.

[MEIGSX2]

Thank you.

[rjs · Accepted solution]

The tax bracket for calculating the tax on a long-term capital gain depends on your total taxable income, including the capital gain. The long-term capital gain is "stacked" on top of your taxable ordinary income. The gain is not necessarily all taxed at the same rate. Only the portion of the gain that fits into the 15% bracket is taxed at 0%.

For example, suppose your filing status is single and your taxable ordinary income is $30,000. The top of the 15% bracket for single filing status is $37,650 (for 2016), so all of your ordinary income falls in the 10% and 15% brackets. You have $7,650 in the 15% bracket that is not used up by your ordinary income. Therefore the first $7,650 of your long-term capital gain would be taxed at 0%. But any additional capital gain above $7,650 falls into the 25% bracket, so it is taxed at 15%. So if you manage to keep your taxable ordinary income just a bit below the top of the 15% bracket, only a small portion of your capital gain will get the 0% tax rate.

Making the situation somewhat better for you, though, note that your tax bracket is based on your taxable income, not gross income. Your taxable income is your gross income minus adjustments (if any), exemptions, and either the standard deduction or itemized deductions.

[MEIGSX2]

OK, so I'm a little confused. If my income is 30,000 where does the 7,650 come from? 30K puts me in the 15% tax bracket period, right. Seems like if I had capital gains of 7,650 I would still be in the 15% tax bracket and that would be that. The capital gains rate for the 15% tax bracket is  0% so I would not pay capital gains. This stuff is harder than Chinese arithmetic. John

[rjs]

The $7,650 is the difference between your $30,000 taxable income and the upper limit of the 15% bracket, which is $37,650. $37,650 - $30,000 = $7,650. It's the amount of space you have left in the 15% bracket for additional income that would still be in that bracket.

If you add a capital gain of $7,650 to the $30,000 of ordinary income, then your total income is $37,650 and, yes, all your income is still in the 15% bracket, but just barely. That's the maximum income you can have and still stay in the 15% bracket. So you are correct that the tax rate on the capital gain would be 0%. But any additional income above the total of $37,650, including any additional capital gain, would go into the next bracket, which is the 25% bracket.

For example, suppose your capital gain was $8,650 instead of $7,650. Your total taxable income is now $38,650, which is $1,000 above the top of the 15% bracket. That additional $1,000 of capital gain would be in the 25% bracket, and would be taxed at the capital gains rate for the 25% bracket, which is 15%. The capital gain is added to your ordinary income, and the total determines what bracket you are in. The amount that falls in the highest bracket - the $1,000 in this example - is considered to be part of the capital gains. That's what's meant by "stacking" the capital gains on top of your ordinary income. The capital gain, or at least part of it, is always treated as being in the highest bracket that you hit.

[spm_no]

This is one of the most coherent explanations of capital gains taxation.  Thank you!!  Very helpful

[humphja1]

I agree - this explanation is excellent.  Thanks so much.

[irishdancer112]

So what is the top of the 15% bracket for single status for 2017?

[rjs]

For 2017 the top of the 15% bracket for someone filing as single is $37,950.

[Loan]

if you have zero ordinary income and you have 38k of capital gains then your total gross income is 38k which means you pay zero capital gains tax. Your 38k is still income however and you have to adjust it with a standard deduction of 12k or you itemize. 38k-12k if you use standard deduction = 26k which is your tax bracket at 12%

[JMYLMY10]

How about married filing jointly with total income of $77 including capital gains?

[VictoriaD75]

Short-term gains are taxed at your ordinary income rate. It is a little different for long-term gains.

The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than $78,750.

A capital gain rate of 15% applies if your taxable income is $78,750 or more but less than $434,550 for single; $488,850 for married filing jointly or qualifying widow(er); $461,700 for head of household, or $244,425 for married filing separately.

However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
2. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.