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Easiest question of the day.

The threshold for paying 0% on long term cap gains is $77,400 for married filers. But I think the ordinary income is added to the LTCG for the purpose of determining the rate.

For example, suppose I had $50,000 in ordinary taxable income plus $100,000 LTCG.

Do I have $50,000 taxed as ordinary income (12% marginal rate), $27,400 at 0% and $72,600 at 15% ?
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The interactions between various sources of income are very complicated. The easiest thing to do is put the figures into Turbotax and see what it says.
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Hi Engr27
Think of your household income subject to taxation as a stacked bar.

On the bottom stacks your ordinary income. This is income from wages, self employment, net rents, taxable interest, pensions, up to 85% of Social Security, non-qualified dividends, retirement plan withdrawals (except a roth IRA), royalties and so forth.

On top of this stack your combined qualified dividends + Net LTCG. You can combine them because they are taxed exactly the same.

Now, add up your deductions. These will come from three possible locations:
1. Any total on Schedule 1, line 36. These used be called 'above-the-line' deductions, as you got to deduct them without itemizing deductions.
2. The greater of your standard deduction or itemized deduction. For most today, the greater will be the standard deduction.
3. Qualified Business Income (or 199A deduction). This will apply if you are self employed and if you hold REITs in a taxable account. See line 9 of your 1040 for 2018

Add 1 & 2& 3 together and subtract it from the preceeding ordinary income. In the stacked bar analogy, take your deductions off the bottom of the stack, allowing the stack to 'drop down'.

Now, for Married Filing Jointly (MFJ) just draw a horizontal line across at $78,750 for 2019. Any Qualified Dividends + LTCG that fall below this line are taxed at 0%. Those above it are taxed at 15% up to $488,850, beyond which they'll be taxed at 20%. And just to complicate this a bit more, if you are MFJ and AGI>250,000, the QD + LTCG will be subject to an additional 3.8% tax.

In the example you give, for 2019 MFJ, the $50,000 of ordinary income AFTER deductions, the first $19,400 will be taxed at 10%. The balance up to $50,000, or $30,600 will be taxed at 12%. The $100,000 LTCG 'stacked' on top of the $50,000.....$78,750 - $50,000 = $28,750.... will be taxed at 0%. The remaining $100,000 - $28,750 = $71,250 will be taxed at 15%. So the total tax on this income would be $1,940 + $3,672 + $10,688 = $16,300.

If you PM me, I have an Excel SS that does all this with a stacked bar.

BruceM
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Think of your household income subject to taxation as a stacked bar.

Good. Your "picture" makes it obvious. Thanks.
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If you PM me, I have an Excel SS that does all this with a stacked bar.

Could you upload it someplace, like dropbox.com, and post the link? That way everybody can grab a copy of it. And anytime in the future this question gets asked again, you can just post the dropbox link.

That's what I've done for a few of my investment & SS spreadsheets.
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Engr27,

BruceCM wrote, In the example you give, for 2019 MFJ, the $50,000 of ordinary income AFTER deductions, the first $19,400 will be taxed at 10%. The balance up to $50,000, or $30,600 will be taxed at 12%. The $100,000 LTCG 'stacked' on top of the $50,000.....$78,750 - $50,000 = $28,750.... will be taxed at 0%. The remaining $100,000 - $28,750 = $71,250 will be taxed at 15%. So the total tax on this income would be $1,940 + $3,672 + $10,688 = $16,300.

Note that BruceCM is assuming you've already taken off at least the standard deduction from the ordinary income. So if your ordinary income was actually just $50,000 and you are not itemizing, you can still take the standard deduction of $24,400 (for 2019). That lowers taxes quite a bit.

To rework what he wrote to show the difference: The first $24,400 will not be taxed. The next $19,400 will be taxed at 10% ($1,940). The balance of $7,200 will be taxed at 12% ($744). The $100,000 LTCG 'stacked' on top of the $50,000.....$78,750 - $50,000 + $24,400 = $53,150.... will be taxed at 0%. The remaining $100,000 - $53,150 = $46,850 ($7,028) will be taxed at 15%. So the total tax on this income would be $1,940 + $744 + $7028 = $9,712.

Substitute your estimated itemized deductions into the math to get your own estimate.

- Joel
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Good point, Joel

Another kind of important take-away to those like Engr27's example who have QD + LTCG in both the 0% and 15% bracket, is what is the marginal tax rate on each dollar of ordinary income added. Interestingly, its not the 12% you might think it to be....its actually 27%.

Consider Engr27's example. Assuming the $50,000 is after the standard deduction. For each $dollar added as ordinary income, this 'lifts' the stack up, putting a QD+LTCG $dollar into the 22% bracket where it is taxed at the 15% instead of 0% rate. Thus the tax increase on that ordinary income dollar added at the margin is 12% (ord income) + 15% (QD+LTCG) = 27%. However, another $dollar of QD+LTCG is taxed at 15% as it 'stacks' on the very top. Just something to keep in mind.

And for what it might be worth and since we're on the subject, if you have sold any income real estate or have REITs in taxable accounts, you'll likely have unrecaptured section 1250 gains. This amount represents the 'recapture' of past depreciation taken on the RE when it is sold and there is a gain on the sale. This unrecaptured Sec. 1250 gain 'stacks' on top of ordinary income but below QD + LTCG, where it is taxed as ordinary income up to a maximum rate of 25%.

And I appreciate the suggestion to put the Excel SS in the 'DropBox'. I just don't like providing files in such a broad public place...makes me nervous. However, I do have my e-mail address listed at the end of my book and so it is in a sort of public place, although likely apparent only to those interested in the topic of income investing. But that e-mail is incomeonly at comcast dot net. Send me an e-mail and I'll reply with the Excel file attached.

BruceM
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Note that BruceCM is assuming you've already taken off at least the standard deduction from the ordinary income.

Yes. The $50k was just an example, and I did mean after standard deduction. I actually had to google "form 1040" to verify that Taxable Income was the right term (it is).

Another kind of important take-away to those like Engr27's example who have QD + LTCG in both the 0% and 15% bracket, is what is the marginal tax rate on each dollar of ordinary income added. Interestingly, its not the 12% you might think it to be....its actually 27%.

Holy crap! It's kind of amazing that I've never seen that fact mentioned anywhere else. I'm not retired quite yet, but I'm trying to plan out how to utilize pension and SS versus LTCG. I don't want to re-ignite the debate on when to start SS, but another factor in favor of delaying it is to keep ordinary taxable income low in order to be able to "liberate" some LTCGs at a low tax rate (which may not be around for long). This effective marginal rate may be very relevant to those decisions. My pension has the same flexibility to delay payments and thereby get higher payments.
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"Interestingly, its not the 12% you might think it to be....its actually 27%.
"
Holy crap! It's kind of amazing that I've never seen that fact mentioned anywhere else.


Wait until you start taking SS and discover that there's 27.7% rate lurking in there.
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Wait until you start taking SS and discover that there's 27.7% rate lurking in there.

Do tell
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Think of your household income subject to taxation as a stacked bar.

Thanks for sharing that.

And the more you think about this, the more you realize you get penalized for working.

For instance, a single filer who saves enough invested money to retire early can "make" $51,575 tax free (federal).

They have $0 "ordinary income", and so the standard deduction of $12,200 is applied against long-term capital gains + qualified dividends, moving the 0% tax rate from $39,375 to $51,575 ($39,375 + $12,200).

For MFJ this number is $103,150 ($24,400 + $78,750). Wow, so a retired couple with a $2.5 million portfolio can withdraw their $100,000 a year (4%) tax free.
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fdoubleol writes,

And the more you think about this, the more you realize you get penalized for working.

For instance, a single filer who saves enough invested money to retire early can "make" $51,575 tax free (federal).

</snip>


That was one of the first lessons I learned when I early retired 25 years ago at age 38.

People living off an investment portfolio almost have to volunteer to pay taxes.

If you manage your retirement portfolio for capital gains and minimize dividend and interest income, you can likely take more than $100,000/year out of your portfolio while only realizing $51,000/yr in capital gains.

And if you live in a Blue State that did the Obamacare Medicaid expansion with a state insurance commissioner who's managing the state insurance market to maximize tax subsidies for the governed rather than sabotage the law, you can likely get a "free" Obamacare Plan (i.e., $0/month premium) with a reported annual taxable income in the low $40,000s.

Yet working people keep voting for tax cuts for billionaires on the hope that the "trickle-down" will give them a job. How's that working for them? Lyndon Johnson offered the best explanation.

https://www.snopes.com/fact-check/lbj-convince-the-lowest-wh...

"If you can convince the lowest white man he's better than the best colored man, he won't notice you're picking his pocket. Hell, give him somebody to look down on, and he'll empty his pockets for you."

</snip>


intercst
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I'd like a copy of this spreadsheet, but I can't find where to PM you on this site. LOL


---------

Bruce Said... If you PM me, I have an Excel SS that does all this with a stacked bar.

Rayvt said... Could you upload it someplace, like dropbox.com, and post the link? That way everybody can grab a copy of it. And anytime in the future this question gets asked again, you can just post the dropbox link.

That's what I've done for a few of my investment & SS spreadsheets.
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Yet working people keep voting for tax cuts for billionaires on the hope that the "trickle-down" will give them a job. How's that working for them? Lyndon Johnson offered the best explanation.

That's certainly the liberal montra, but I'm not finding that to be the case under the TCJA.

Whether high income households will pay more or less in Fed tax really depends on where they live, what and how much in deductions they've taken in the past and if they are a business owner, what kind of business and how are they organized.

For example, a high income household of a married couple both attorneys (or entertainers or sports figures) in S. California with an AGI of, say, $5MM, owning two homes with combined property tax of $50K and state income tax of $500K, in 2018, saw their itemized SALT deduction go from $550,000 to $10,000, and they do not get to participate in the 20% QBI deduction. Do you think they're Fed income tax will go up or down?

OTOH, a building contractor organized as an LLC with the same $5MM AGI living in WA and paying $10,000 in property tax, depending on other deductions, will most likely see a reduction in Fed tax.

Around Sept 2020, the IRS should release the SOI Tax Stats for Individuals and small business for 2018. At that point, we'll know who the primary beneficiaries are of the TCJA, and I don't think it'll be the "Millionaires and Billionaires".

BruceM
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I'd like a copy of this spreadsheet, but I can't find where to PM you on this site. LOL

holzapfel
Go back and look at my previous posting. I put my e-mail address there, which you can use to send me a private e-mail

BruceM
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The interactions between various sources of income are very complicated. The easiest thing to do is put the figures into Turbotax and see what it says.

This is OK "after the fact," that is, once you've made all your decisions and are just trying to figure out the correct amount to pay. However, that method is very unsatisfying for *planning*. If you're faced with a choice, you may not make the optimum decision by ignoring the taxes fall and letting them where they may.

When I was trying to figure out when (if at all) the best time would be to convert IRA money to Roth IRA, I wanted to account for the fact that having income that doesn't count as taxable income (from the Roth) wouldn't drive my social security from untaxed to 85% taxed. In eight or ten years, I can just plug it into a tax software, but that doesn't help me decide if I should do a conversion in three to five years. Rolling up my sleeves and putting the provisional income calculations into a spreadsheet did show that. (It's got a lot of nested IF statements.)

Thanks to BruceM's explanation of cap gains taxable income, someone so inclined can make the same assessment on his/her taxes to arrive at the best strategy.

Of course, the rules can change, and even if they don't, the breakpoints change so one may find it would have been better to do something with a few dollars more or a few less, but it'll still be better than not trying at all.
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Yet working people keep voting for tax cuts for billionaires on the hope that the "trickle-down" will give them a job. How's that working for them? Lyndon Johnson offered the best explanation.

I suspect that working people are not so much voting for billionaire tax cuts as for voting against things like forgiving student loans (tuition + rent + food + spring break vacation + etc.) all paid for by people whose food + rent + everything else weren't incurred during college, or were paid off already by doing things like studying a field that allowed a decent income and/or not attending a dream school but an affordable college and/or forgoing some luxuries in order to pay back loans. Alternatively, maybe some voters are turned off by being excoriated for being "against immigrants," when in actuality they are against illegal immigration.

There might be a great Democrat candidate out there, who would appeal to broad swaths of the middle, but if he's Pro-Life (i.e., believes that an unborn child is a life, even if he's [she's?] *NOT* against women deciding for themselves individually) that torpedoes his chances. Or, he may have worn blackface/brownface as part of a costume in high school, and oddly enough, that by itself is sometimes a disqualifier.
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There might be a great Democrat candidate out there, who would appeal to broad swaths of the middle....

There were.
They had names like Hickenlooper, Ryan, Delaney and Bullock...and maybe Howard Schultz. Each had their own quirks, but each knew...and most publicly said....the ultra liberal socialist-leaning government control ideas are unworkable and trying to fund these crazy-expensive programs by raising taxes on the rich were equally unworkable. They're all gone now...the media it seems has no patience for anyone not towing the hard left progressive agenda.

Its a shame, really, as having such responsible and experienced voices in the debate could have made this all interesting and worth watching.

BruceM
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"The easiest thing to do is put the figures into Turbotax and see what it says."

This is OK "after the fact," that is, once you've made all your decisions and are just trying to figure out the correct amount to pay. However, that method is very unsatisfying for *planning*.
...
I wanted to account for the fact that having income that doesn't count as taxable income (from the Roth) wouldn't drive my social security from untaxed to 85% taxed. In eight or ten years, I can just plug it into a tax software, but that doesn't help me decide if I should do a conversion in three to five years.


Use turbotax for the tax calculations and then plug the amount of tax it tells you into a spreadsheet.
I did this several years ago, wanting to see how the SS tax-bullet hits you.
Set up a clean tax form with only 2 sources of income, ordinary income and SS benefit. Set up for zero withheld so it was easy to see the tax amount..it was "tax owed" right at the top of the TT form.
Varied ordinary income from $20K to $100K with constant above-average (familiy) SS benefit of $35K.
Write down the tax in a column and then compute the additional tax from the previous line (next lower ord income) and then compute the marginal rate in the next column.
Easy to see the marginal rate started at 15% then went to 28% as the SS began to get taxed, then dropped back to 15% when the maximum 85% of SS was taxed. It then stayed at 15% until the next tax bracket (25%).

Then I did it again in another section with same total income, but all ordinary and no SS. This was to emulate deferring SS to see how the tax compared. The marginal rate stayed at 15% until it hit the 25% bracket. But the amount of tax was much higher. Ex: at $65K total income the tax _with_ SS was $1700 whereas the tax _without_ SS (that is, all ordinary income) was $5600.

This would be like taking the same income to live on, but one way was taking some 401K & SS and the other was taking it all from 401K and none from SS---which is what you'd do if you deferred SS.

This showed me that there is a large additional tax cost if you defer taking SS. None of the take SS early/late discussions ever talk about that.

Ah, yes, of course you could use a clever spreadsheet like Bruce's to figure out the tax. But it is REAL EASY for such a spreadsheet & calculations to be wrong, and hard for one to take into account different things like single/joint, standard deductions vs. actual, etc. Turbotax is almost certainly going to get all those complex calculations right.


(It's got a lot of nested IF statements.)

Professional programmers see this type of thing as "bugs that are hard to see".
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When I was trying to figure out when (if at all) the best time would be to convert IRA money to Roth IRA,

People and authors & magazine columnists go on and on about this. So did I in the first few years after I retired. Then one day I realized that all I was doing was shuffling the same money around and my IRA money was just taking a little diverting side-trip via the Roth account.

Now, I see that all it does is change *when* you pay the income tax on the IRA withdrawals. Either now (when you convert) or later (when you withdraw). Assuming you are in the same tax bracket, it makes no difference.

The one time it *can* make a significant difference is if you are in a lower bracket now than you will be several years from now. And the big reason for that would be if you are married-joint now and are in single later.

I haven't yet modeled that in Turbotax & spreadsheet.
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Now, I see that all it does is change *when* you pay the income tax on the IRA withdrawals. Either now (when you convert) or later (when you withdraw). Assuming you are in the same tax bracket, it makes no difference.

Even if my tax bracket doesn't change, I'll take 22% now to convert rather than 22% later PLUS pushing my social security from 0% taxed to 85% of it taxed at 22%.

It may not save hundreds of thousands of dollars, but even if it only saves a thousand a year, it's worth the eight or ten hours now to plan it out.
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The one time it *can* make a significant difference is if you are in a lower bracket now than you will be several years from now. And the big reason for that would be if you are married-joint now and are in single later.

And with the current tax law, many people are currently in a lower bracket than they will be beginning in 2026. Which is why, under current law, it may be advantageous to do conversions for the next several years - through 2025.

As always, the law can be changed on the whims of politicians, so what seems advantageous now might not end up actually being advantageous.

AJ
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