Does capital gains push me above tax thresholds?

[ctuser1]

Let's assume the following tax situation(s):
1. Married filing jointly.
2. MAGI : $240k/year (hypothetical number).

This couple wants to sell RSU's with long term capital gains = $300k in any given year.

How is the Obamacare/Medicare surtax calculated?
Since wages are < $250k, is medicare tax of 0.9% not applicable?
How about Obamacare investment tax of 3.8%? Does it only apply on ($300k + $240k - $250k)? Or some other amount?

How much of the long term capital gains are subject to which rate? Since MAGI (including capital gains) will cross $488850 (MFJ limit for 15% capital gains rate), will the entire capital gain be subject to 20% rate? i.e. is it better to make sure that the MAGI (including capital gains) stay below the $488850 limit in any given year?

As you can tell from the above, I am a bit clueless about the actual tax calculations. For several years I have just gotten into the habit of letting TurboTax do the calculations and blindly taking that number. Starting this year, I am hoping to educate myself a lot more. I'll fill up a manual 1040 side by side with TurboTax so that I understand what it is doing.

So thanks in advance for your patience with my n00b questions.

[secondcor521]

Since MAGI (including capital gains) will cross $488850 (MFJ limit for 15% capital gains rate), will the entire capital gain be subject to 20% rate?

No.  Just the portion that exceeds the relevant bracket start point.  15% on the portion below that, 20% on the portion above it.  (Likewise with the start point of the 15% bracket.)

Not sure on the other questions.

[ctuser1]

Since MAGI (including capital gains) will cross $488850 (MFJ limit for 15% capital gains rate), will the entire capital gain be subject to 20% rate?

No.  Just the portion that exceeds the relevant bracket start point.  15% on the portion below that, 20% on the portion above it.  (Likewise with the start point of the 15% bracket.)

Not sure on the other questions.

How is it stacked? "Earned Income" -> then Capital Gains, or the other way around?

In this case, the couple covers the 0% space with W2 income. So I'm assuming none of the capital gains are taxed at 0%. Is this accurate?

[secondcor521]

Since MAGI (including capital gains) will cross $488850 (MFJ limit for 15% capital gains rate), will the entire capital gain be subject to 20% rate?

No.  Just the portion that exceeds the relevant bracket start point.  15% on the portion below that, 20% on the portion above it.  (Likewise with the start point of the 15% bracket.)

Not sure on the other questions.

How is it stacked? "Earned Income" -> then Capital Gains, or the other way around?

In this case, the couple covers the 0% space with W2 income. So I'm assuming none of the capital gains are taxed at 0%. Is this accurate?

Earned income first, then capital gains stack on top.

Then the standard deduction is lopped off the bottom.

Then ordinary income is taxed according to ordinary income tax brackets.

Then capital gains are taxed according to capital gains tax brackets.

I believe your second statement is accurate.  MFJ 0% cap gains bracket ends at ~$24K standard deduction + $80K 0% cap gains bracket.

Best thing to do is to fill out a mock return in Turbotax and then find and understand the Qualified Dividends and Capital Gains worksheet, which is where this stuff is figured.  You should be able to print the Worksheet somehow within Turbotax.

[secondcor521]

Oh, and this might help:

https://engaging-data.com/tax-brackets/

It doesn't do the NIIT 3.8% surcharge, but it does ordinary income and capital gains.

[ctuser1]

Since MAGI (including capital gains) will cross $488850 (MFJ limit for 15% capital gains rate), will the entire capital gain be subject to 20% rate?

No.  Just the portion that exceeds the relevant bracket start point.  15% on the portion below that, 20% on the portion above it.  (Likewise with the start point of the 15% bracket.)

Not sure on the other questions.

How is it stacked? "Earned Income" -> then Capital Gains, or the other way around?

In this case, the couple covers the 0% space with W2 income. So I'm assuming none of the capital gains are taxed at 0%. Is this accurate?

Earned income first, then capital gains stack on top.

Then the standard deduction is lopped off the bottom.

Then ordinary income is taxed according to ordinary income tax brackets.

Then capital gains are taxed according to capital gains tax brackets.

I believe your second statement is accurate.  MFJ 0% cap gains bracket ends at ~$24K standard deduction + $80K 0% cap gains bracket.

Best thing to do is to fill out a mock return in Turbotax and then find and understand the Qualified Dividends and Capital Gains worksheet, which is where this stuff is figured.  You should be able to print the Worksheet somehow within Turbotax.

Thanks a lot. This is extremely useful.

Explaining something in simple terms is an art. You have it. I wish to master it someday.

Believe it or not, I googled and googled and never found a simple explanation like you mentioned above.

[secondcor521]

Thanks for the kind words.

There is more complexity, but as a parent to young adults, I have learned that it is good to start with simpler concepts that are roughly true and then refine them by providing the additional complexity as needed.  I've also learned from being on the Q end and the A end that it is better to answer people's questions where they are at, because that's what they're focused on learning at that moment, and answering that one thing will make that thing learnable - the extra complexity can be too much and usually can't be assimilated.

There is some additional complexity I left out of my previous answer:  long-term vs. short-term, gains vs. losses, different kinds of property can have different rates, capital losses can offset ordinary income to a certain point and can carry over to future years, states sometimes tax capital gains at ordinary income tax rates, etc.

Usually,  though, I blather on too much.

[ctuser1]

Thanks for the kind words.

There is more complexity, but as a parent to young adults, I have learned that it is good to start with simpler concepts that are roughly true and then refine them by providing the additional complexity as needed.  I've also learned from being on the Q end and the A end that it is better to answer people's questions where they are at, because that's what they're focused on learning at that moment, and answering that one thing will make that thing learnable - the extra complexity can be too much and usually can't be assimilated.

There is some additional complexity I left out of my previous answer:  long-term vs. short-term, gains vs. losses, different kinds of property can have different rates, capital losses can offset ordinary income to a certain point and can carry over to future years, states sometimes tax capital gains at ordinary income tax rates, etc.

Usually,  though, I blather on too much.

Do you happen to have any internet tutorial or source that will explain things in such a step by step manner? I'm good in, and find comfort in math. It seems very difficult, however, to find tax concepts in the clear and concise language of math anywhere :-(.

I'm starting the process of estate planning for us, and really really need to understand the tax complexities now.

[secondcor521]

Unfortunately I don't.

What I did was to read the IRS forms and publications.  There is a popular notion that they're hard to understand, but for me they're easier to understand and more precise than the popular blogs and news articles.  As a bonus, they're authoritative and correct 99.999% of the time.  They are also arranged by topic, so if you want to know about college savings tax-related things, you go to Pub 970.  If you want to read about the ACA premium tax credits, you go to Form 8962.  And so on.  Sometimes they have illustrative examples.

The main drawback is that the information can be hard to find, although that's easier now with google and the IRS website having it's own search function.  Also, I guess it's hard to know "what's out there" - if you don't know about the retirement savings tax credit, you won't know to search for it.  For this there are two solutions:  1.  Sit down sometime and scan through every line of Form 1040 and the main schedules (Schedules 1, 2, 3) and read the descriptions.  Then if something seems applicable (maybe you're a teacher and you see a deduction for educator expenses - hey, it could apply to you!) then read up more on that topic.  The description on the 1040 becomes a google-able term.  2.  Read articles and web sites about finances and taxes; they'll often talk about new tax things, changes to existing tax things, etc.

I guess also find someone who knows more than you about the topic and ask them for help.  I do know some stuff about estate planning, but that's a complicated topic that varies from state to state, so I'm not sure how much help I would be.

[terran]

What I did was to read the IRS forms and publications.  There is a popular notion that they're hard to understand, but for me they're easier to understand and more precise than the popular blogs and news articles. 

Agreed. For example, run through the "Qualified Dividends and Capital Gain Tax Worksheet" on page 33 of the Form 1040 instructions a few times with different types of income and you'll get a good idea of the answers to all the questions  in this thread.

[ctuser1]

What I did was to read the IRS forms and publications.  There is a popular notion that they're hard to understand, but for me they're easier to understand and more precise than the popular blogs and news articles. 

Agreed. For example, run through the "Qualified Dividends and Capital Gain Tax Worksheet" on page 33 of the Form 1040 instructions a few times with different types of income and you'll get a good idea of the answers to all the questions  in this thread.

Thank you.

This year I plan to hand calculate the taxes in parallel to Turbotax. I will try to mess around with the instruction worksheet examples for capital gains.

[MDM]

This year I plan to hand calculate the taxes in parallel to Turbotax. I will try to mess around with the instruction worksheet examples for capital gains.

Consider building your own spreadsheet, unless that's what you already meant by "hand calculate".

And just checking: which MAGI?

[ctuser1]

This year I plan to hand calculate the taxes in parallel to Turbotax. I will try to mess around with the instruction worksheet examples for capital gains.

Consider building your own spreadsheet, unless that's what you already meant by "hand calculate".

And just checking: which MAGI?

I had no idea there are so many different versions of MAGI. Well, you learn something new every day.

I am thinking of my taxes as the following pseudo-code:

AGI = __function_of__(W2_income, dividends, 401k, HSA)
AGI_state = __function_of__(AGI, 529)

MAGI = __function_of__(AGI, standard_deduction)
MAGI_state = __function_of__(AGI_state, standard_deduction)

TAX_state_NY = NY_TAX(MAGI_state)
TAX_state_CT = CT_TAX(MAGI_state, _credit_for_state_local_taxes_already_paid_to_NY)

TAX_federal = FED_TAX(MAGI, credit_for_state_and_local_taxes)

I'm sure there are open source libraries for tax calculations, but my goal is to understand on my own. So I'll try building some excel with formula for the above, or something else.

For some reason, I've worked on *so* many financial/accounting systems, but have never worked on the tax calculation side of things. So that is a bit of a mystery to me. Tell me to do an NPV calc and I have done that many times. Taxes - never! :-(

[MDM]

This year I plan to hand calculate the taxes in parallel to Turbotax. I will try to mess around with the instruction worksheet examples for capital gains.

Consider building your own spreadsheet, unless that's what you already meant by "hand calculate".

And just checking: which MAGI?

I had no idea there are so many different versions of MAGI. Well, you learn something new every day.

I am thinking of my taxes as the following pseudo-code:

AGI = __function_of__(W2_income, dividends, 401k, HSA)
AGI_state = __function_of__(AGI, 529)

MAGI = __function_of__(AGI, standard_deduction)
MAGI_state = __function_of__(AGI_state, standard_deduction)

TAX_state_NY = NY_TAX(MAGI_state)
TAX_state_CT = CT_TAX(MAGI_state, _credit_for_state_local_taxes_already_paid_to_NY)

TAX_federal = FED_TAX(MAGI, credit_for_state_and_local_taxes)

I'm sure there are open source libraries for tax calculations, but my goal is to understand on my own. So I'll try building some excel with formula for the above, or something else.

For some reason, I've worked on *so* many financial/accounting systems, but have never worked on the tax calculation side of things. So that is a bit of a mystery to me. Tell me to do an NPV calc and I have done that many times. Taxes - never! :-(

Replace "MAGI" with "Taxable_Income" in the pseudo-code and you have it.

The tax calculations in the case study spreadsheet are "open source."  Feel free to use those to check your personal work as applicable.

[ctuser1]

Posting to report back a very modest success story as far as my understanding of the tax calculations go!!

In my excitement of actually going through and understanding bits and pieces of it, I exercised my impatient trigger finger at the end of Jan and filed my tax returns using turbo tax. At that time I thought I had accounted for all income (W2/1099) and deductions.

Sure enough, come first week of Feb and a few more tax forms trickle in:
1. I completely forgot about some Disney paper stock I purchased when kiddo-1 was born. Dividend statements came in for a grand total of $30. They even changed brokers now. Broadridge used to send these statements earlier!! Bummer!
2. <A big large bank likely everyone uses> sent me a $26 dividend statement. I don't recognize this account. I thought I only use them for some specific retirement account(s) opened for opening bonuses+ongoing reward status benefits - so I'm not sure why they would send me a 1099-DIV for that! I guess more digging is required. But I am not going to fight over taxes on a $26 dividend statement.
3. Our local YMCA sent me a child care tax statement for $12XX. I completely forgot that kiddo1 went to the YMCA-run afterschool for the first 3 months of 2019. @0.2X, this should net me some nice extra tax refund.

So I am back to project amended return now. Turbotax doesn't have them available yet. But the paper forms are available at the appropriate tax websites. So, I am actually in the middle of filling out the paper (actually, fillable PDF) versions of these forms. Therein lies my "modest success" and excitement.

The federal 1040x is super simple. Just 2 pages. Nothing confusing in the form itself. I found it a little confusing to figure out what to attach to it and which address to send it to. But that's not too bad.

I'm still trying to figure out the CT form. It looks like I may have to actually e-file it at a CT Government website. On the first look, however, it doesn't look too complicated. I will likely owe a few $ extra taxes to CT (CT doesn't have any childcare tax credit).

NY IT-203X is another matter, however! It is 6 pages long and is just as confusing as their original paper 203. You also have to send them all attachments you had had sent in with the original return. This is a pain!

But anyway, I'm feeling a little jazzed about finally getting some clue how all the *complicated* tax stuff works. It's not *that* complicated!

Hopefully, in a year or two I should be able to do approximate mental calculations of Fed/NY/CT tax impacts of any marginal money decisions regarding 401k/HSA/529/taxable etc.