topic Why are capital gains being taxed at more than 15%? in Get your taxes done using TurboTax

Why are capital gains being taxed at more than 15%?

mzk02 — Sun, 04 Apr 2021 04:24:28 GMT

I'm well below any limits that would result in my capital gains being taxed at more than 15%, but am anticipating taking some large capital gains this year. When I increase the proceeds of my LT capital gains by 100,000 exactly to test the likely impact on the upcoming year's taxes (i.e. I increase the proceeds by 100,000 and leave the basis unchanged), my total tax increases by about $18,000. Total income, including capital gains, is less than 300,000 so my understanding is that my capital gains tax should increase by exactly 15,000. Worse yet, when I make the hypothetical capital gain exactly 1 million, then the effective capital gains seem to be taxed at 23%. (I realize at this level of capital gains the tax rate will increase to 20%, but nothing higher than that.) What am I misunderstanding here? There is no AMT and I just take the standard $24,000 deduction. I cannot find a single article on the internet that explains why the effective capital gains tax rate exceeds 15%.

One article was very explicit that capital gains tax are taxed AFTER ordinary income so the capital gains tax should not be pushing my ordinary income into a higher bracket. So for the 100,000 hypothetical capital gain, this should be a simple 15% of $100,000.

Re: Why are capital gains being taxed at more than 15%?

Mike9241 — Sun, 04 Apr 2021 07:32:07 GMT

there is a net investment income tax of 3.8 % form 8960

the NIIT equals 3.8 % of the lesser of

1) net investment income or

2) the excess (if any) of Modified Adjusted Gross Income over $250,000 for married taxpayers.

also the way the capital gain tax works. say you had taxable income all LTCG of $1 million

$80K taxed at 0

$416.6K taxed at 15%

$503.4k taxed at 20%

about $775K taxed at 3.8 %

so total federal tax would be about $193K

look at the capital gain worksheet to see the actual comps under your assumptions

now add $100K to taxable income that's ordinary income. your federal tax bill goes up by about $32.4K

that $80k taxed at 0% almost disappears

an additional $100K is taxed at 20%

the $100K of ordinary income is taxed less the standard deduction of $24,800 (net $75,200) taxes about $8.6K

then there's the additional NIIT of $3.8K

Re: Why are capital gains being taxed at more than 15%?

mzk02 — Sun, 04 Apr 2021 12:21:08 GMT

Thanks!! Great answer!!