Stepping up cost basis & long term capital gains taxes

[modulus]

As I think towards the end of the year, I am considering moving some Vanguard stock in a taxable account from small cap to VTSAX.  This would trigger long-term capital gains.  However, I want to make sure I will not accidentally have to pay capital gains tax on this income.  When looking at this threshold, I find that the magical number for 2015 is $37,450 in income from wages, capital gains, etc.

However, my question to you all is, is this $37,450 number after the standard deduction and personal exemption ($6300 + $4000), or before?  For example, if my 2015 numbers were $40,000 income and $5000 capital gains, would I owe $0 or $750 in taxes on the capital gains?

[DaveR]

$37,450 after standard deduction & personal exemption. In your example you would owe $0.

[branman42]

Doesn't the capital gains get added in there though? So if the OP was $2,500 under the limit, they would pay 0% on the first $2,500 and then 15% on the next 25%?
I have no idea if that is correct, just makes sense, so asking the question.

[Cathy]

Doesn't the capital gains get added in there though?

The amount of capital gains is indeed related to how much tax is owed on capital gains. The relevant rules are described in 26 USC § 1(h). The IRS has written a publication that summarises these rules, which you may find helpful: Publication 550, Ch 4, § "Capital Gains Tax Rate". Please be aware of the usual qualifications about IRS publications.

[seattlecyclone]

Doesn't the capital gains get added in there though?

The amount of capital gains is indeed related to how much tax is owed on capital gains. The relevant rules are described in 26 USC § 1(h). The IRS has written a publication that summarises these rules, which you may find helpful: Publication 550, Ch 4, § "Capital Gains Tax Rate". Please be aware of the usual qualifications about IRS publications.

Can you please quit trying to scare people away from relying on IRS publications? They are not the law, sure, but they almost never incorrectly explain the law, especially for situations as common as this. In the unlikely event that you're hauled in front of a tax court, your lawyers will have to cite statutes in your defense, not IRS publications. That doesn't mean it's necessary or prudent for average people to read through the tax code to make sure that the IRS's publication writers aren't trying to pull a fast one on them.

[Cathy]

[IRS publications] almost never incorrectly explain the law...

I don't know whether your claim is true because I haven't read every IRS publication in full. In addition, the publications are modified on a regular basis. Evaluating the accuracy of them is a moving target. In several of our past posts, both MDM and I have identified some dubious claims or omissions in IRS publications.

One notable omission regarding a mainstream topic is that I have been unable to locate any IRS publication that correctly describes the law regarding whether and to what extent the capital gains on sale of a primary residence can be excluded from income. Instead, I have to refer people to a Kitces article. This particular IRS omission has nearly led some forum posters into making very wrong decisions relative to real property disposition. As I mentioned above, the IRS publications are updated on a regular basis, so it is possible that there is a publication that correctly describe the rules somewhere now, although I still can't locate a correct description of the relevant law in one of their publications. At the time of writing, Tax Topic 701 and Publication 523 still contain significant omissions and incorrect statements and definitely should not be relied on.

I would not feel comfortable stating that IRS publications are "almost never" incorrect, and in fact I am very sceptical of that claim.

Can you please quit trying to scare people away from relying on IRS publications?

As discussed above, possible inaccuracies in IRS publications are a legitimate concern, but that's not the only reason why I include qualifications when referencing IRS publications. Other reasons include:

• I believe there is value in people understanding how the law works, and one of the most basic principles is that Congress writes the income tax laws, not the IRS. Thus, I continually affirm that principle by reiterating that IRS publications are not the law.
• Because I have not read every IRS publication and because the publications are regularly updated, I do not know whether the specific publication under discussion is 100% accurate or whether it will still be 100% accurate after the next modification. I want to avoid endorsing something of unknown accuracy. I wouldn't want readers to misunderstand my posts and think that I am endorsing a publication when, in truth, I actually am not sure whether it is accurate now or whether it will be accurate in the future.

I will continue to include qualifications when discussing these publications.

[Tabaxus]

Doesn't the capital gains get added in there though?

The amount of capital gains is indeed related to how much tax is owed on capital gains. The relevant rules are described in 26 USC § 1(h). The IRS has written a publication that summarises these rules, which you may find helpful: Publication 550, Ch 4, § "Capital Gains Tax Rate". Please be aware of the usual qualifications about IRS publications.

Can you please quit trying to scare people away from relying on IRS publications? They are not the law, sure, but they almost never incorrectly explain the law, especially for situations as common as this. In the unlikely event that you're hauled in front of a tax court, your lawyers will have to cite statutes in your defense, not IRS publications. That doesn't mean it's necessary or prudent for average people to read through the tax code to make sure that the IRS's publication writers aren't trying to pull a fast one on them.

It seems clear to me that Cathy is either a CPA or an attorney (or maybe both).  The qualifications are the right ones to add, both because the qualifications are correct, and because Cathy takes on some risk even discussing the law and providing citations (it's a risk I refuse to take) and is entitled to caveat the heck out of whatever Cathy posts.

What an odd post.  "You're not being helpful in the kind of way that I think you should be helpful!"

[kkbmustang]

It seems clear to me that Cathy is either a CPA or an attorney (or maybe both).  The qualifications are the right ones to add, both because the qualifications are correct, and because Cathy takes on some risk even discussing the law and providing citations (it's a risk I refuse to take) and is entitled to caveat the heck out of whatever Cathy posts.

I'll take Door Number 3: she is neither a CPA, nor an attorney.

[brooklynguy]

I'll take Door Number 3: she is neither a CPA, nor an attorney.

I like to take this cartoon as a statement about the "great equalizer" effect of internet anonymity.  Based solely on the information contained within the four corners of this forum, none of us knows whether any other is an attorney, CPA, computer literate canine, or anything else.  As far as I know, Cathy has never claimed to be either an attorney or a CPA, but, despite her frequent ventures into complex matters of tax law (and other legal areas), I don't recall her ever having made a single statement on any tax or legal topic that was demonstrated to be incorrect (unlike many of the self-identified professionals in the forum, like myself).  So, whatever professional designations or accreditations she in fact holds or does not hold, when Cathy offers an opinion on a subject, I tend to give it a lot of weight, based purely on the content of her posting history.  But we should all really evaluate all content posted on this forum on its own merits, not on the basis of the identity of its author.