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Hi all,

I have two questions about the tax treatment of capital gains. I returned to school this year to complete a graduate degree, meaning that I have zero income for the year. However, I have about $100K in unrealized long-term capital gains that I am thinking of selling, partly because I think that my capital gains taxes would be lower given that I have no income. I'm unsure, though, about a few things regarding how the capital gains would be treated.

I've read that your capital gains rate depends on your tax bracket - the 10 and 15 percent bracket has a zero percent rate for LT gains, and all other brackets have a 15% rate. I'm wondering, though, do the capital gains themselves raise one's tax bracket? Since I would have $100K in gains, would this bump me up to the 33% (or whatever) tax bracket, and thus raise my capital gains rate to 15%? Or are capital gains treated entirely separately from income, and my tax bracket would be the zero percent bracket?

Along those lines, can I reduce my tax burden on capital gains the same way I would be able to with income, through charitable giving? In other words, if I have a capital gain of $100,000 and I give $25,000 to charity, can I deduct this from the capital gain so that I am only taxed on $75,000? Or are you only allowed to deduct from ordinary income?

Thanks!
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In other words, if I have a capital gain of $100,000 and I give $25,000 to charity, can I deduct this from the capital gain so that I am only taxed on $75,000? Or are you only allowed to deduct from ordinary income?

If you're planning to give $25K to charity, and you still think the investment is a good investment, I'd probably wait until I had significant income, and then give the appreciated stock. (there is no capital gains on donated stock)
At least I'm *assuming* that you're going to have significant income in a year or 3.

Even if you don't want to wait, I'd still plan on giving the appreciated stock to the charity. It'll mean a little delay (3-5 business days in my experience) from when you tell your brokerage to transfer it to when they actually do the transfer. And that means the $ amount donated is not under your control completely.

I'll let the experts address the questions you posed. (my expectation is cap gains income is still income)
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Think of the dollars in your taxable income (line 43 of the 2012 form 1040) as a stacked bar. On the bottom of the bar is ordinary income. On top of this is unrecaptured Sec. 1250 capital gain. On top of this is, I believe, qualifying dividends. On top of this is any long term capital gains. And so on.

So if your gross income is, say, $100,000 of LTCG, this will go on line 22 and assuming you have no above the line deductions, will also go on line 37/38. You'll then subtract your standard deduction and personal exemption for 2013 of $10,000, leaving $90,000 of taxable income. The first $36,250 of this will not be subject to tax as it is in the 15% bracket. The remaining $53,750 would be Fed taxed at 15%, or $8,062.50. You'd have to have a taxable income of $200,000 to go to the 20% rate.

I'm in a bit of a rush so don't have time to double check my figures, but I believe this is correct.

BruceM
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I have a capital gain of $100,000 and I give $25,000 to charity, can I deduct this from the capital gain so that I am only taxed on $75,000?

Donating appreciated stock held over a year to charity has the benefit that you don't pay taxes on the capital gains and the total amount is deductible.
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You mentioned the capital gains are long term. I don't understand the need to realize the gains all at once?
An inherited share of Berkshire Hathaway (BRK-A) from 18+ years might be the exception, so what's the urgency in
taking all the gains in one year?
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