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Author: ImCalvin Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: is long term cap gains income? Date: 4/23/2005 6:36 PM
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If I purchased a stock ten years ago in a regular brokerage account for $10 per share and sold it today for $60 I would have long term capital gains of $50 per share. How would I calculate the total tax owed, is it just $7.50 (15% of $50), is that $50 added to my income or is it some combination of both?

Sorry for the really basic question, but your help is much appreciated.

-Ben

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 78922 of 121061
Subject: Re: is long term cap gains income? Date: 4/23/2005 7:00 PM
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If I purchased a stock ten years ago in a regular brokerage account for $10 per share and sold it today for $60 I would have long term capital gains of $50 per share. How would I calculate the total tax owed, is it just $7.50 (15% of $50), is that $50 added to my income or is it some combination of both?

All of the above. Your capital gain is added to your other income in determining AGI and, ultimated, taxable income. When it gets time to compute tax, your net long-term capital gain is treated differently. See the instructions for the "tax" line of Form 1040.

Phil

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Author: ImCalvin Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 78923 of 121061
Subject: Re: is long term cap gains income? Date: 4/23/2005 7:15 PM
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Thanks so much Phil, just to make sure I read it correctly, it would be

7.50 (long term gain tax)
12.50 (addl income tax - 25% bracket)

So I should save $20 of the $50 gain for additional taxes? Thanks again!

-Ben


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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 78924 of 121061
Subject: Re: is long term cap gains income? Date: 4/23/2005 7:50 PM
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So I should save $20 of the $50 gain for additional taxes?

No. Just 15%, or $7.50. As Phil said, your capital gain is a part of your gross income, and eventually, your taxable income. But when it comes time to actually compute the tax, the (long-term) capital gain is separated out and taxed at 15% (if you're in the 25% bracket).

You might find it instructive to play with some numbers to see how this works. Get a 1040 form and a Sched D, try it with and without cap gains, and see what the difference is. (Note that with cap gains, the tax is figured on a Sched D Tax Worksheet - that's where long-term capital gains are split off and taxed at a lower rate than ordinary income.)

(Don't forget that your state will be taxing those capital gains, too - the $7.50 per $50 gain is just for federal taxes.)

Lorenzo

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 78925 of 121061
Subject: Re: is long term cap gains income? Date: 4/23/2005 10:36 PM
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lorenzo2 writes (in part):

No. Just 15%, or $7.50.

I reply:

Actually, this may or may not be correct. If ImCalvin is in a phase-out range for one or more deductions, then the extra AGI will increase the phase-out, thereby decreasing deductions, increasing taxable income, and increasing tax.

For example, for sufficiently high AGIs, many itemized deductions phase out at the rate of 3%. And medical deductions always need to surpass a floor of 7.5% of AGI. Therefore, it's possible that an additional $1000 of long-term capital gains could decrease itemized deductions by $105, yielding additional tax (at the 25% marginal rate) of $150 + $26.25 = $176.25, for an effective marginal tax rate (applied to long-term capital gains) of 17.625%.

There are many possible phase-outs that may be implicated (not to mention the possibility that AMT may be triggered), so the only way to know in advance is to run some estimated numbers. If the potential gain is significant, I strongly recommend that ImCalvin do so, so that he won't be caught short at tax time. --Bob

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Author: ImCalvin Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 78926 of 121061
Subject: Re: is long term cap gains income? Date: 4/24/2005 12:06 AM
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Ok, one last time. The capital gains are counted as part of my income, but are taxed at a separate rate (15% in this case). The fact that it's still counted as part of my income is important because it may disqualify me from contributing to a Roth IRA or other benefits that are have specific income limits.

Thanks very much Lorenzo and Phil!

-Ben

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 78927 of 121061
Subject: Re: is long term cap gains income? Date: 4/24/2005 12:47 AM
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Ok, one last time. The capital gains are counted as part of my income, but are taxed at a separate rate (15% in this case). The fact that it's still counted as part of my income is important because it may disqualify me from contributing to a Roth IRA or other benefits that are have specific income limits.

Right. As Bob78164 correctly notes, it's not necessarily as simple as saying your tax will increase by 15% of your LT capital gain - other things, like phaseouts, may come into play.

Also as Bob78164 notes, the best way to see what happens is to run some numbers. Take your just-concluded tax return, add in $10,000 (or whatever is appropriate) in LT cap gains, use the Sched D worksheet to work out your tax, and see what the result is. Just be aware that some things (like itemized deductions or credits) may change because your AGI is larger.

Lorenzo



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