Qualified dividends and capital gains taxed marginally?

[mikescepaniak]

I'm giving FIRE a try this year. I consider it an experiment, as I'm not sure it'll work. One of the biggest question marks I have regarding FIRE is taxes. I've always outsourced my tax preparation. As a result, I'm not as close to the calculations as I could be. One of the biggest question marks I have had regarding post-FIRE taxes is the tax owed on qualified dividends and capital gains should they cause me to exceed the 0% capital gains maximum taxable income threshold.

I've feared that, should I realize just a few too many dollars of profit when selling stock holdings for a gain, I'd blow past the threshold ($38,600 for single filers, I believe), which would then cause all of my qualified dividends and long-term capital gains to be taxed at %15, rather than 0%. However, thanks to MDM's Case Study Spreadsheet (and the annotated "Qualified Dividend and Capital Gain Worksheet" calculations contain therein), I'm now of the understanding that qualified dividends and long-term capital gains are taxed marginally, not absolutely. Meaning, only the portion of the qualified dividends and long-term capital gains income that exceeds the 0% threshold is taxed, not all of it. Is this correct?

I found the following discussions to reinforce this conclusion:

• https://money.stackexchange.com/questions/28968/how-are-long-term-capital-gains-taxed-if-the-gain-pushes-income-into-a-new-tax-b
• https://www.reddit.com/r/tax/comments/6v1d2z/is_capital_gains_taxed_marginally/

I'd appreciate everyone's input. Thanks in advance.


Mike....

[terran]

Yes it sounds like you now understand how it works. Capital gains and qualified dividends work just like any other income in that they are taxed at the rate that applies to the bracket they're in. So if you go $1 over the 0% bracket you'll pay 15% of $1, or $0.15.

Do remember that all sources of income stack on top of one another, so tax deferred withdrawals or roth conversions, and earned income can also push capital gains above the 0% bracket.

[MDM]

Yes, you understand correctly.  Well done!

[mikescepaniak]

Awesome! Thanks for confirming. I appreciate it.

And, MDM, thank you for your efforts with that spreadsheet. A great contribution to the community.

[boarder42]

You have another 12k of space due to deductions you don't appear to be accounting for.

And holy shit that first post you made was eye opening.

Capital gains are last and anything over the threshold is only what is taxed at that level. I think we need a sticky about how this works. I'm pretty knowledgeable around here and did not understand this. I thought I had to keep all my spending below the 12% + standard deduction in FIRE or all my ltcgs would be taxed at 15% instead of 0. This is an eye opening revelation.

[mikescepaniak]

Thanks. It's great to know I'm not alone in my fogginess here. On the one hand, I get a bit frustrated not knowing all of this. On the other, I enjoy working through it all like a puzzle. The know-how is out there and available. It's just a matter of finding it and putting in the effort to understand it. With this topic, the calculations for the "Qualified Dividend and Capital Gain Worksheet" are right there in front of your face, but they are so literal. It took MDM's brief annotations for it to (start to) click for me.

You have another 12k of space due to deductions you don't appear to be accounting for.

I assume you mean the standard deduction. If so, I'm aware. Thanks. With my original post, I was trying to keep the scenario and numbers concise. If you or anyone else is interested in reading the details, feel free - https://blog.michaelscepaniak.com/starting-stopping-working

This is the point of the article where I got this tax aspect wrong - https://blog.michaelscepaniak.com/starting-stopping-working#too-much-income

I intend to go back and correct it.