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<< Okay, let's say that I had a very good year and out of foolishness (or stupidity, take your pick), sold enough in my positions to realize short-term capital gains totaling $100,000 for the year. I am in the 15% tax bracket. Let's assume that my Adjusted Gross Income before the gain is included is $25,000. With the proceeds from the gain, I put down $60,000 on a $120,000 house and finance the remainder.

Realzing that this is, to say the least, a foolish situation, what are the tax implications here? Is the entire $125,000 Adjusted Gross Income taxed at 39.6% (or higher) or is there a double whammy of 28% on the $100,000 and 39.6% on the remaining $85,400? >>

"Tax bracket," a/k/a your "marginal" rate, is the percentage at which your LAST dollar of income is taxed. It's really not a terribly useful figure, but it seems to be very important to a lot of people. To see how much you're really paying in income tax, divide the total tax on the return by your total income.

All dollar amounts from here out are for Single filing status and 1999 taxes. The numbers are different for each filing status and each year, and can always be found in the Tax Rate Schedules in the 1040 instructions or the 1040-ES instructions for the current year. Your tax is computed on your taxable income. You get to taxable income as follows:

Gross Income - Adjustments to Income = Adjusted Gross Income (AGI)
AGI - exemptions ($2750 each) - Standard ($4300) or itemized deductions = taxable income.

The first $25,750 of taxable income is taxed at 15%. The next $36,700 is taxed at 28%. The next $67,800 is taxed at 31%. The next $152,900 is taxed at 36%. Finally, for those really wondering where their next meal will come from, taxable income above $283,150 is taxed at 39.6%.

There are some special ways of computing tax, for example when there are long-term capital gains, but this is the basics.

Phil Marti
Tax Preparer

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