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Let's say, for simplicity's sake, that your yearly salary is $1000 and thus you are in a low tax bracket (call it 15%, even if it's zero). Now let's say you incur $40,000 in short-term capital gains. Is that $40,000 taxed at 15%? Or is it first added to your regular income, for a total of $41,000, and then your tax bracket is computed

Short-term cap gains? I think you mean LTCG.

STCG are taxed exactly the same as ordinary income. Let's keep your example, and say that the15% bracket tops out at 25K (0-25K at 15%, everything over is at 28%). You have 41K of, eseentially, ordinary income. 25K gets taxed at 15% (3,750 in taxes), the remaining 16K gets taxed at 28% (4,480 in taxes) Your total tax liability would then be 8,230.

For long term cap gains, which are taxed at a lower rate, the rules would be: all your LTCG that brings you up to 25K (the top of the 15% bracket) gets taxed at 10%, everything over that would get taxed at 20%.

Remember that the federal tax brackets are marginal brackets. If you earn 70K, you might be "in the 28% bracket", but that doesn't mean that all your income gets taxed at 28%. The first 25K (or whatever) would get taxed at 15%, and only the amount above that would get taxed at 28%.

REMINDER--the income and "bracket" numbers in this example were made up for illustrative purposes. See the current form 1040 from the IRS website for complete information, or my post 20490 on this board for partial info.


PS- what new cap gain rules for 2001?!?
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