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Author: Rebecca1998 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121180  
Subject: Capital Gains Date: 9/27/2001 10:12 AM
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Greetings All,

I am new to the board. I have a question regarding capital gains. Most of my income this year will come from short term capital gains. It should amount to about 90,000 in short term gains and about 50 in long-term gains. I think the tax brackets look something like this:

fed
24 15%
24-58 28%
58-121 31%
121-263 36%
263- 39.6%

My question is if I had 140 in AGI (assume 3000 in salary) after all the different exemptions, would I pay 36% on all of the income, or would I pay 31% on all income up to 121, and then 36% on all income thereafter to 135? If it is the former, I may try to either sell calls on a few postions (The primary gainers were technology shorts originated in late July), or hold a few until 2002.

Thanks in advance and I wish everyone a wonderful Yom Kippur,

Any assistance would be greatly appreciated
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Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54254 of 121180
Subject: Re: Capital Gains Date: 9/27/2001 10:51 AM
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My question is if I had 140 in AGI (assume 3000 in salary) after all the different exemptions, would I pay 36% on all of the income, or would I pay 31% on all income up to 121, and then 36% on all income thereafter to 135? If it is the former, I may try to either sell calls on a few postions (The primary gainers were technology shorts originated in late July), or hold a few until 2002.

The new tax brackets in effect for this year are here:
http://www.taxplanet.com/newtaxlaws/newlaws2001/taxtables2001/taxtables2001.html
They changed as a result of the new tax act.

You pay the rate on income within that bracket, not on the entire income. ie 15% on income up to $27,050, 27.5% on income between $27,501 to $65,500 (single) etc.

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Author: malakito Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54255 of 121180
Subject: Re: Capital Gains Date: 9/27/2001 11:02 AM
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Rebecca,

The tax brackets which you need to apply depend on your filing status, which in turn depends on your marital status. I went looking at your other posts to see what your marital status was -- you mention a husband in one. I believe that if you are legally married at the end of the tax year you must choose between married filing jointly or married filing separately. If you are divorced from him, you can file single. If you're in some other situation, you'll probably want to check the rules to figure your filing status.

The rates you list don't match any of the actual tax brackets, but they appear to be closest to the single bracket. You can always find the tax brackets by going to www.irs.gov and downloading the 1040ES form (Here's the direct link for the year 2001 version in PDF format: http://ftp.fedworld.gov/pub/irs-pdf/f1040e01.pdf) Every year the brackets get adjusted for inflation.

The way it works, basically, is this: You would take your AGI and subtract your deductions and exemptions to get your taxable income. Since you probably itemize (?), it is pretty difficult to say what your taxable income is except that it would be lower than your AGI. Assume for the sake of discussion that your taxable income turned out to be $100K. Your short term gains are treated as ordinary income, so you would add the $90K of short term gains to your $100K taxable income and have $190K that would be taxed at ordinary income tax rates. You then take this $190K and fill up each of the brackets in turn, starting with the lowest bracket. Using the numbers from your post as an example:

The first $24K would be taxed at 15%
$58K-$24K = $34K would be taxed at 28%
$121K-$58K = $63K would be taxed at 31%

At this point the rest of the $190K (whatever 190-24-34-63 works out to be) would be taxed at a 36% rate.

At this point, since you're in the 36% bracket, your $50K in long term gains would have a capital gains rate of 20% applied. (Long term capital gains have a lower tax rate than short term capital gains and ordinary income.)

So your federal income taxes would be figured as follows:

(24000 * .15) + (34000 * .28) + (63000 * .31) + ((190000-24000-34000-63000) * .36) + (50000 * .20)

I hope that helps.

--malakito.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54256 of 121180
Subject: Re: Capital Gains Date: 9/27/2001 11:04 AM
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My question is if I had 140 in AGI (assume 3000 in salary) after all the different exemptions, would I pay 36% on all of the income, or would I pay 31% on all income up to 121, and then 36% on all income thereafter to 135?

The second half of your statement is closer to correct. You pay tax at 15% on the first part of your income, 28% on the next part, 31% on the next part, and so on. So changing to another tax bracket doesn't cause a sudden large jump in your tax.

Now for the technical corrections. The maximum tax rate on your long-term gains is 20%. So that will move you down squarely into the 31% bracket. You pay the tax on your taxable income, not your AGI, so you should have $6-7K or more in deductions from your income, depending on your itemized deductions. The tax table you listed looks to be for single taxpayers and a couple of years old. The current dollar ranges are a bit higher. Further, the tax law that just recently passed reduced the tax rates by 1/2% for the current year. They will drop another 1/2% next year (in 2002) Finally, your capital transactions aren't taxable until you actually close them (assuming that your not affected by the mark-to-market rules). I think you already know that but I just want to make sure.

One planning item. If you have state income taxes to pay on this income, you may want to consider paying it before the end of the year. That way it would be deductable this year against your higher income. You have to run the numbers to see if it makes sense for your sutuation.

--Peter

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