Author Topic: Are capital gains taxed like income? Tax guy tell me yes (?)  (Read 5970 times)

meteor

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Are capital gains taxed like income? Tax guy tell me yes (?)
« on: March 03, 2014, 05:20:48 PM »
I always thought that long term capital gains taxes are 0 as long as you stay in or under the 15% tax bracket.  And (unlike ordinary income), once you cross over the 25% tax bracket --  ALL your capital gains taxes are taxed at the 15% rate, not just the amount that pushes you over into that bracket.  Is that true?

My plan for 2014 was to keep my capital gains under $33,000 dollars so I would pay *no* taxes.  I thought that if I accidentally went over that amount, then the entire amount would be taxed at the 15% cap. gains rate.  Who is right?

the fixer

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #1 on: March 03, 2014, 05:58:01 PM »
It's hard to explain, best way to see is to play with the worksheet on page 43 of http://www.irs.gov/pub/irs-pdf/i1040.pdf

I think that if your non-capital-gains income is under the 25% cutoff, the portion of capital gains income that's below gets taxed at 0%, the rest at 15%. The best way to tell is to just come up with scenarios and plug them into the worksheet.

Joel

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #2 on: March 03, 2014, 09:19:22 PM »
Your tax guy is correct.

LTCGs are income just like anything else. However, if your taxable income is below the 25% tax bracket, they are taxed at 0%. For each dollar above the 15% tax bracket, those dollars are taxed at 15%. (This can actually created a scenario where you are being taxed at a marginal 30% rate for each additional dollar of ordinary income or each dollar of a deduction you can come up with)

Cheddar Stacker

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #3 on: March 03, 2014, 09:51:13 PM »
I'm thouroughly confused by your question, can you clarify a bit? Mainly, I don't know what your argument is, and what the "tax guy's" argument is. Let me try to just give you some facts rather than answering a question I can't figure out.

Long-Term Capital Gains are income and they are taxed at capital gains tax rates, not ordinary rates. The long-term capital gain rate is either 0% (for the 10-15% brackets) or 15% (for the 25-35% tax brackets) or 20% for the 39.6% bracket. This doesn't include the new medicare tax for investments, but that's only for AGI > $250K so you likely don't have to worry about that.

Short-Term Capital Gains are income and they are taxed at ordinary tax rates, so whatever bracket you are in, that's your tax rate.

Tyler

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #4 on: March 03, 2014, 10:19:43 PM »
Also, not all capital gains are taxed equally.  For example, gold is taxed at the collectibles rate.  With taxes things are never simple so it depends on your personal holdings.

If you think your tax guy is wrong, have him explain his reasoning.  If you still disagree, talk to another tax professional.

foobar

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #5 on: March 04, 2014, 08:29:24 AM »
Tax guy. Probably.  Long term Capital gains/qualified divs are income but they are NOT ordinary income. Short term Capital gains are ordinary income. The other thing to remember is that if you live in a state with income tax, they may not exclude capital gains.


I always thought that long term capital gains taxes are 0 as long as you stay in or under the 15% tax bracket.  And (unlike ordinary income), once you cross over the 25% tax bracket --  ALL your capital gains taxes are taxed at the 15% rate, not just the amount that pushes you over into that bracket.  Is that true?

My plan for 2014 was to keep my capital gains under $33,000 dollars so I would pay *no* taxes.  I thought that if I accidentally went over that amount, then the entire amount would be taxed at the 15% cap. gains rate.  Who is right?

Spork

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #6 on: March 04, 2014, 09:31:16 AM »

A followup question (asked, but not answered in a different thread):  If you're ER and living off of these gains... I presume you have to pay quarterly estimated taxes?  I've never had this "problem" ... as I've always had enough employment income/withholding to cover.

nicknageli

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #7 on: March 04, 2014, 10:27:12 AM »
My understanding is you don't have to pay quarterly, but you'll face penalties at the end of the year if you owe too much.

MDM

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #8 on: March 04, 2014, 10:54:56 AM »
And you will have given Uncle Sam an interest-free loan if you pay too much in estimated or withheld tax.

It can get a bit complicated, e.g. see http://www.irs.gov/publications/p17/ch04.html.

There are also simpler-but-may-not-cover-all-situations explanations, such as http://www.easyestimatedtaxes.com/estimated-tax-resources/safe-harbor-rule.html

From our experience (YMMV), adjusting withholding has been better than doing estimated tax.  This of course assumes  withholding exists that you can affect via W-4 forms.  If nothing is being withheld for you at all, and you expect to owe >$1000 to the IRS, then you should do estimated tax payments.

meteor

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #9 on: March 04, 2014, 11:02:34 AM »
My understanding is you don't have to pay quarterly, but you'll face penalties at the end of the year if you owe too much.

Does this mean that if you stay in the 15% tax bracket and only cash out and live off mutual funds (long term cap gains taxed at 0%), does that mean your taxes due at the end of the year will be *zero*?

nicknageli

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #10 on: March 04, 2014, 11:12:34 AM »
My understanding is you don't have to pay quarterly, but you'll face penalties at the end of the year if you owe too much.

Does this mean that if you stay in the 15% tax bracket and only cash out and live off mutual funds (long term cap gains taxed at 0%), does that mean your taxes due at the end of the year will be *zero*?

I'm not confident enough with taxes in retirement to say with much certainty.  Sorry.  Maybe someone else will chime in with their thoughts. 

seattlecyclone

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #11 on: March 04, 2014, 11:15:40 AM »
My understanding is you don't have to pay quarterly, but you'll face penalties at the end of the year if you owe too much.

Does this mean that if you stay in the 15% tax bracket and only cash out and live off mutual funds (long term cap gains taxed at 0%), does that mean your taxes due at the end of the year will be *zero*?

More or less, yes. In my experience, a portion of the dividend that many index funds pay out is not considered a "qualified dividend," which means you'll pay regular income tax on this income. But if that income ends up being less than your standard deduction/personal exemption(s), and the rest of your income is long term capital gains and qualified dividends, you could very easily have no federal income tax liability.

nicknageli

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #12 on: March 04, 2014, 11:19:16 AM »
More or less, yes. In my experience, a portion of the dividend that many index funds pay out is not considered a "qualified dividend," which means you'll pay regular income tax on this income. But if that income ends up being less than your standard deduction/personal exemption(s), and the rest of your income is long term capital gains and qualified dividends, you could very easily have no federal income tax liability.

It's my understanding that even if you don't pull cash from your money market (for example) and it earns a bunch of interest, it's still income and will be taxed for the year that you earn it.  Same goes for dividends regardless of whether you've sold the stock.

Someone slap me if that's wrong.

MDM

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #13 on: March 04, 2014, 12:23:49 PM »
For what it's worth, below is a summary from TaxACT based on $40,000 of qualified dividends and $50,000 long term capital gain.  Married filing jointly, no kids, no other income or special circumstances

Federal Tax Summary
Income:$90,000
Adjustments:$0
Adjusted gross income:$90,000
Deductions:$12,200
Exemptions:$7,800
Taxable income:$70,000
Tax computed on Qualified Dividends Capital Gain WS:$0
Alternative minimum tax:$0
Credits:$0
Other taxes:$0
Payments:$0
Underpayment penalty:$0
Federal Refund:$0

I picked Missouri as a state ("Show Me"), and it indicated ~$4K in state tax owed when I finished the federal part.

Spork

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #14 on: March 04, 2014, 12:51:14 PM »
My understanding is you don't have to pay quarterly, but you'll face penalties at the end of the year if you owe too much.

Does this mean that if you stay in the 15% tax bracket and only cash out and live off mutual funds (long term cap gains taxed at 0%), does that mean your taxes due at the end of the year will be *zero*?

I did about a 3 year "pretirement" from 2006-2009.  And no: I paid no taxes.  I didn't cash out anything, as I built it up in a money market account beforehand.  I did receive a bit in dividends, but it was not enough to trigger any taxes. 

sheepstache

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Re: Are capital gains taxed like income? Tax guy tell me yes (?)
« Reply #15 on: March 04, 2014, 06:05:20 PM »
My understanding is you don't have to pay quarterly, but you'll face penalties at the end of the year if you owe too much.

Does this mean that if you stay in the 15% tax bracket and only cash out and live off mutual funds (long term cap gains taxed at 0%), does that mean your taxes due at the end of the year will be *zero*?

More or less, yes. In my experience, a portion of the dividend that many index funds pay out is not considered a "qualified dividend," which means you'll pay regular income tax on this income. But if that income ends up being less than your standard deduction/personal exemption(s), and the rest of your income is long term capital gains and qualified dividends, you could very easily have no federal income tax liability.

This.  As to the original question about if you end up in the 25% bracket, my understanding is the _portion_ that pushes you into the 25% bracket is taxed at the cap gains rate for the 25% bracket (which, for long term cap gains is 15%).  The portion that falls within the 15% bracket gets the 0% rate.  It follows the "your tax bracket is the amount you pay on the last dollar you earned" rule. 

Also I believe if you also have earned income and cap gains push you over into the next bracket, the tax code puts that on top.  So you pay the higher tax bracket on the cap gains, not your earned income.  Which is good.

Not a tax professional here, just something I looked into awhile ago.