Skip to main content
Question Protected by Chris W. Rea
Tweeted twitter.com/#!/StackFinance/status/443516763633090560
edited tags
Link
Chris W. Rea
  • 31.8k
  • 17
  • 103
  • 190
Source Link

How are long-term capital gains taxed if the gain pushes income into a new tax bracket?

First, my understanding is that the long-term capital gains tax rate is 0% for those whose marginal rate on ordinary income is 10% or 15%, and (ignoring the highest 39.6% bracket) the rate is 15% for everyone else. (See this IRS publication and this article.)

My interest is in what happens at the crucial break between the 15% and 25% bracket, which is $73,800 for married/joint returns in 2013 (and presumably will be higher in 2014, though I haven't been able to find out what that is or if it has even been set yet). Let's say a household has $64,000 in wage income, and sells stock for a $10,000 profit.

  1. Does their income for the purposes of establishing their tax bracket go to $74,000?
  2. If so, is the entire $10,000 profit subject to the 15% long-term capital gains rate?
  3. Is any part of the wage income subject to the higher marginal tax rate?

Since the amount of income subject to the higher marginal rate is, well, marginal, part 3 seems somewhat less important than part 2. The real issue is whether the capital gains rate hits the entire profit, since, in that case, it seems the household should only sell enough stock to generate a $9000 profit, and sell the remainder in a future year.