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All income including long term and short term capital gains (losses to varing degrees) figures into your gross income. You then calculate your adjusted gross income. From your adjusted gross income, you deduct itemized deductions and exemptions (assuming you are not at phase out levels). That leaves you with taxable income.
Thanks RooCat. I get confused b/c it seems as if some items can only be deducted against WAGES income (e.g. medical expenses). Do I have this wrong, or are all deductions (except IRA's, retirement stuff) deductable from ANY type of income.

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