Earnings vs income? There’s a difference right?

TuckerdogAVL — Tue, 04 Jun 2019 00:23:22 GMT

Earnings vs. income. Our income includes pensions, sale of stock, dividends, etc. But our earnings are 1099s, W2s, correct? So, when I am looking at withdrawing (age 65) $3000 from an IRA or SEP IRA, and I’m concerned about cap gains, I don’t pay any of those if I w/d and our “earnings” are less than $35000 correct? So, do I have to pay federal “income” tax on that money (say $3000)?

It can really depend. "Earnings" can have a number of di...

DanielV01 — Tue, 04 Jun 2019 00:23:24 GMT

It can really depend. "Earnings" can have a number of different nuances in meaning, depending on the context of the subject. In your case, you are talking about earnings related to capital gains vs. earnings related to an IRA/SEP IRA. Both use the word earnings and they mean two different things.

When it comes to an IRA or similar plan, earnings refer to the growth in the plan after contributions. (Contributions are called basis, which is especially important to know if the IRA is a non-deductible IRA because you can recover your basis tax-free since you already paid tax on those contributions). Capital gains tax is not have calculated on your IRA earnings. The reason why is that the earnings are tax-deferred, in other words, they are not taxable until you withdraw them, at which point they are taxed at your marginal rate.

Stock sales, on the other hand, are treated differently. Earnings on stock sales are taxed at capital gains treatment. The earnings are the difference between the original price you paid for the stock and the sales price. If you have held the stock for at least 1 year and 1 day, the sale receives long-term capital treatment: your gain is taxed at a favorable rate. For the most part, if your income is in the 10 or 12 percent tax brackets, your long-term capital gains tax rate is $0, for higher brackets, the tax rate is 15% (20% if in the highest tax bracket). A short-term gain is taxed like ordinary income when held for 1 year or less.

What will determine your capital gains tax is your taxable income, in other words, the sum total of all of your sources of taxable income minus deductions that bring you down to the amount of income that is actually taxed.

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Earnings vs income? There’s a difference right?

It can really depend. "Earnings" can have a number of di...