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Subject:  Re: Trader tax bracket Date:  7/9/1999  7:51 PM
Author:  TMFTaxes Number:  17119 of 127745

[[I understand the basics about tax brackets, ie that the first part of your income is
taxed at 15%, then next at 28, and so forth (ie for simplicity if the cutoffs were
10k and 20k and I made $15k, then $10k would be taxed at 15%, and the
remaining $5k would be taxed at 28%, thus giving me a total tax rate of about

Basically correct...

[[ What I want to check on is this situation. Let's say I decided I could live off
stock trading alone. To make it easy lets say I earn $15k during the year in short
term, and $15k in long term.]]

By definition, long term holdings represent "investing" and not "trading". I don't know where you are going to go with this issue, but I thought I'd make that distinction right up front. But let's move on.

[[ The long term is taxed at 20% [using my #'s above,
I think this is right....but don't worry about the %. I understand that the long term
capital gains rates are lower if you are in certain lower backet(s)], under long
term capital gains, but the short term, using my fabricated #'s above, would be
taxed at about 19.5%. Thus, even though I brought in $30k, I managed to keep
my taxes low by utilizing approaches with a combination of short and long term

Assuming no other income, and assuming the rates that you are using for your example, this is basically correct.

[[ A further adjustment of investment portfolio could make it so all of my short term
profits fall under the lowest bracket, and everything else is long term. Thus not
only do I score a rock botton % for the short term profits, but I also get to use
the even lower capital gains rates available to people in certain low bracket(s).]]

Nope...this is where we part company. Your long term gains will begin to "fill up" your next bracket, and would require the utilization of a higher capital gains rate.

Using your numbers and tax rates, your first $10k (short term gains) would be taxed at 15%. Your next $5k would be taxed at the 28% rate. And your $15k long term gains would put your "normally" in the 28% bracket, which would then require a preferred capital gain rate of 20%. That's how it really works.

[[ Sorry, I guess I'm thinking out loud instead of really asking a question. I just
want to double check on this because it seems like a nice advantage to
some....which I might be using next year. I understand that tax rates aren't
everything, but details like this could make the annual % of short term vs long
term less of an issue, in which case it might be nice to just sit back with the long
term ones and drink a tropical drink of choice :)]]

Again, I'm not sure that I'm answering the question you are asking...or if I really understand the question. But look at it this way: Let's say that you had only $5k of income, and $50k of long term capital gains. Not ALL of the cap gains would be taxed at the 10% preferred rate. Again, using your "cut off" rates, the first $5k would be taxed at 15% ordinary rate, the next $5k in long term gains would have a preferred rate of $10%, and the remaining $45k of long term gains would be taxed at the preferred rate of 20%.

[[ Let me know if there are any blatant errors in my thought process here....or if it
looks right. Thanks]]

Hopefully this helps...

[[ (sending in tax money to the IRS quarterly will be my next question once I
research it a little more, so hold off on comments on that for a couple of days :)]]

Why wait?? Read my post in the Taxes FAQ area about estimated taxes. You'll get the backround that you need.

TMF Taxes

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