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Author: 4aapl 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: of 121061  
Subject: Trader tax bracket Date: 7/9/1999 4:14 AM
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I understand the basics about tax brackets, ie that the first part of your income is taxed at 15%, then next at 28, and so forth (ie for simplicity if the cutoffs were 10k and 20k and I made $15k, then $10k would be taxed at 15%, and the remaining $5k would be taxed at 28%, thus giving me a total tax rate of about 19.5%)

What I want to check on is this situation. Let's say I decided I could live off stock trading alone. To make it easy lets say I earn $15k during the year in short term, and $15k in long term. The long term is taxed at 20% [using my #'s above, I think this is right....but don't worry about the %. I understand that the long term capital gains rates are lower if you are in certain lower backet(s)], under long term capital gains, but the short term, using my fabricated #'s above, would be taxed at about 19.5%. Thus, even though I brought in $30k, I managed to keep my taxes low by utilizing approaches with a combination of short and long term investments.

A further adjustment of investment portfolio could make it so all of my short term profits fall under the lowest bracket, and everything else is long term. Thus not only do I score a rock botton % for the short term profits, but I also get to use the even lower capital gains rates available to people in certain low bracket(s).

Sorry, I guess I'm thinking out loud instead of really asking a question. I just want to double check on this because it seems like a nice advantage to some....which I might be using next year. I understand that tax rates aren't everything, but details like this could make the annual % of short term vs long term less of an issue, in which case it might be nice to just sit back with the long term ones and drink a tropical drink of choice :)

Let me know if there are any blatant errors in my thought process here....or if it looks right. Thanks

Aaron

(sending in tax money to the IRS quarterly will be my next question once I research it a little more, so hold off on comments on that for a couple of days :)
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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17111 of 121061
Subject: Re: Trader tax bracket Date: 7/9/1999 4:03 PM
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I am not sure what you are asking, but if you get the capital gains tax form and work your senarios through it you will see that long term capital gains are calculated and then reduced in value (if income limitations are met). A portion of the long term gain is then added to your income before your normal income tax rate is applied.

Regardless of your income level (unless you exceed the maximums) you will pay taxes at your regular rate on short term gains and reduced rates on your long term gains.

If all your income comes from investments you will probably be required to make quarterly payments of estimated taxes.

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Author: 4aapl 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: 17112 of 121061
Subject: Re: Trader tax bracket Date: 7/9/1999 4:20 PM
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"A portion of the long term gain is then added to your income before your normal income tax rate is applied."

Is that right? This is basically what I was asking about....are there any things like this that I just wasn't seeing.

Though I didn't have any long term capital gains last year, I went through the form just to test it out. I don't remember seeing anything like that....it looked like all of the long term gains dropped out before the value was added back into your normal income. But if I missed something like this I definitly want to know about it now rather that later. Thanks

Aaron

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Author: DowDanny Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17113 of 121061
Subject: Re: Trader tax bracket Date: 7/9/1999 4:35 PM
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it looked like all of the long term gains dropped out before the value was added back into your normal income.

none of your LT capital gains will "contribute" to your "wages income" which is taxed according to your marginal "tax bracket."

however, all of your (net) LT capital gains DO contribute to your total AGI (adjusted gross income) which is used to determine which Tax Bracket you fall into.

So... your LT cap gains are all taxed at the LT cap gains tax rate, but your wages-income/ST cap gains are taxed at rate that DOES depend on the amount of LT cap gains reported on the same 1040.

Clear ?

- D

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17119 of 121061
Subject: Re: Trader tax bracket Date: 7/9/1999 7:51 PM
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[[I understand the basics about tax brackets, ie that the first part of your income is
taxed at 15%, then next at 28, and so forth (ie for simplicity if the cutoffs were
10k and 20k and I made $15k, then $10k would be taxed at 15%, and the
remaining $5k would be taxed at 28%, thus giving me a total tax rate of about
19.5%)]]

Basically correct...

[[ What I want to check on is this situation. Let's say I decided I could live off
stock trading alone. To make it easy lets say I earn $15k during the year in short
term, and $15k in long term.]]

By definition, long term holdings represent "investing" and not "trading". I don't know where you are going to go with this issue, but I thought I'd make that distinction right up front. But let's move on.

[[ The long term is taxed at 20% [using my #'s above,
I think this is right....but don't worry about the %. I understand that the long term
capital gains rates are lower if you are in certain lower backet(s)], under long
term capital gains, but the short term, using my fabricated #'s above, would be
taxed at about 19.5%. Thus, even though I brought in $30k, I managed to keep
my taxes low by utilizing approaches with a combination of short and long term
investments.]]

Assuming no other income, and assuming the rates that you are using for your example, this is basically correct.

[[ A further adjustment of investment portfolio could make it so all of my short term
profits fall under the lowest bracket, and everything else is long term. Thus not
only do I score a rock botton % for the short term profits, but I also get to use
the even lower capital gains rates available to people in certain low bracket(s).]]

Nope...this is where we part company. Your long term gains will begin to "fill up" your next bracket, and would require the utilization of a higher capital gains rate.

Using your numbers and tax rates, your first $10k (short term gains) would be taxed at 15%. Your next $5k would be taxed at the 28% rate. And your $15k long term gains would put your "normally" in the 28% bracket, which would then require a preferred capital gain rate of 20%. That's how it really works.

[[ Sorry, I guess I'm thinking out loud instead of really asking a question. I just
want to double check on this because it seems like a nice advantage to
some....which I might be using next year. I understand that tax rates aren't
everything, but details like this could make the annual % of short term vs long
term less of an issue, in which case it might be nice to just sit back with the long
term ones and drink a tropical drink of choice :)]]

Again, I'm not sure that I'm answering the question you are asking...or if I really understand the question. But look at it this way: Let's say that you had only $5k of income, and $50k of long term capital gains. Not ALL of the cap gains would be taxed at the 10% preferred rate. Again, using your "cut off" rates, the first $5k would be taxed at 15% ordinary rate, the next $5k in long term gains would have a preferred rate of $10%, and the remaining $45k of long term gains would be taxed at the preferred rate of 20%.

[[ Let me know if there are any blatant errors in my thought process here....or if it
looks right. Thanks]]

Hopefully this helps...

[[ (sending in tax money to the IRS quarterly will be my next question once I
research it a little more, so hold off on comments on that for a couple of days :)]]

Why wait?? Read my post in the Taxes FAQ area about estimated taxes. You'll get the backround that you need.

TMF Taxes
Roy



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Author: 4aapl 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: 17132 of 121061
Subject: Re: Trader tax bracket Date: 7/9/1999 8:57 PM
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[[Again, I'm not sure that I'm answering the question you are asking...or if I really understand the question. But look at it this way: Let's say that you had only $5k of income, and $50k of long term capital gains. Not ALL of the cap gains would be taxed at the 10% preferred rate. Again, using your "cut off" rates, the first $5k would be taxed at 15% ordinary rate, the next $5k in long term gains would have a preferred rate of $10%, and the remaining $45k of long term gains would be taxed at the preferred rate of 20%. ]]

Thanks, that takes care of my question exactly. I was bored at work today and so played around with the 1040 and schedual D on my own too, and came up with the exact same thing.

-short term gains are taxed like normal income
-if, including short term gains, your tax rate is still in the 15% bracket, then your long term gains until you have "filled up" this bracket are taxed at 10%
-any remaining long term gain is taxed at 20%

For example, I followed through the forms with $20k short term gains, $40k long term gains, and $500 for both intrest gains and dividends, and used the '98 values for a single person. This gave a tax of $8981, so only 14.7% of the total $61k. If the values were changed slightly to have all gains from LT, then the tax is $8275, or 13.6%. Not too big of a difference. But, this would change a lot more if you went the other way. With the breakdown of 40k ST and 20k LT, it comes to $10246, or 16.8%. This will be helpful for me (and others) to remember when looking at LT vs ST investments and trading.

[[Why wait?? Read my post in the Taxes FAQ area about estimated taxes. You'll get the backround that you need.]]

That's exactly the "research" that I also did today. Looks to me like since my goal is a 30% return, (I've been doing much better than that :) that I might as well just file as normal and let the IRS figure out the exacts on the 9% intrest that I owe them for not paying in increments throughout the year. I think this is what you suggested in the Tax FAQ (which is a great resource, BTW)

Thanks for the help and confirmations. Often it's hard to know if what you think is right really is.

Aaron

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17157 of 121061
Subject: Re: Trader tax bracket Date: 7/11/1999 12:43 AM
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That's exactly the "research" that I also did today. Looks to
me like since my goal is a 30% return, (I've been doing much
better than that :) that I might as well just file as normal and
let the IRS figure out the exacts on the 9% intrest that I owe
them for not paying in increments throughout the year. I think
this is what you suggested in the Tax FAQ (which is a great
resource, BTW)


Actually all you have to do is have enough withholding from your salary to equal 1998s tax (or 105% if you had a AGI of $150,000 or over in 1998), even if it is one shot in December. Then there's no penalty and you can pay the rest next April. No installments necessary. Also, the interest rate is currently 8%. Since you like to study, read Form 2210 and Instructions for this "safe harbor". Ed

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