Personal Finance (Not Investing) • Tax Bracket Confusion

Hello, Community - I hope you are doing well.

Multiple sources say that "taxable income" establishes a tax bracket.

Not exactly true. Your ordinary income establishes your ordinary income tax bracket (10, 12, 22, 24, 32%, etc.) The LTCG and QDs are taxed on a different scale of brackets (0, 15, or 20%).

However, taxable income includes long-term capital gains (taxed at a lower rate). For example, a person earns $40k and has a standard deduction. But he/she has a $700k LT capital gain. Does it mean his/her tax bracket is 37%?

No. The ordinary income bracket will be very low (depending on marital status). The LTCG bracket will be 20%. Well, not exactly 20% because of the NIIT....so 23.8%. However, a good portion of those gains will be taxed at lower rates (actually several lower rates including some at 0%).

I miss something important here and hope someone can help me understand (a simple example would be best).

The tool provided by retired@50 should help you see this more clearly.

Statistics: Posted by retiredjg — Wed Mar 06, 2024 8:39 am — Replies 6 — Views 700

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