NEW! - Can Capital Gains Push Me Into a Higher Tax Bracket?

Summary

This video explains how long-term capital gains tax works, particularly addressing whether capital gains can push ordinary income into higher tax brackets. Using examples, it explores how income and deductions are treated in 2023 tax returns, and highlights the interplay between ordinary income and capital gains tax. The video also covers scenarios for retirees, including potential tax traps related to Social Security and Medicare. The presenter emphasizes the importance of proactive tax planning to avoid surprises when filing tax returns.

Takeaways

• 📈 Capital gains on company stock can qualify for long-term capital gains, which receive favorable tax treatment.
• 🧮 There are key differences in tax rates between ordinary income and long-term capital gains, which taxpayers need to understand.
• 💰 In 2023, joint filers can benefit from a 0% tax rate on long-term capital gains up to $89,950.
• 🤔 Taxpayers often wonder if long-term capital gains push their ordinary income into higher tax brackets, which is addressed in the video.
• 📊 Capital gains are taxed on top of ordinary income, meaning ordinary income is taxed first, and capital gains are applied after.
• 💼 Selling stock does not push wages into higher tax brackets, although certain caveats exist for those on Social Security or Medicare.
• 🧾 Bob and Sally's example demonstrates how capital gains stack on top of their $60,000 income, without affecting their ordinary income tax brackets.
• 🔢 Taxpayers may pay blended tax rates on capital gains, meaning only the amount above specific thresholds is taxed at a higher rate.
• ⚠️ Retirees should be cautious about tax traps, such as capital gains causing their Social Security income to become taxable or increasing their Medicare premiums.
• 🛠 Proactive tax planning is essential to avoid surprises, especially for individuals receiving Social Security or on Medicare.

Q & A

What is the main difference between the tax rates for ordinary income and long-term capital gains in 2023?

In 2023, ordinary income is taxed at higher marginal rates, while long-term capital gains have lower rates, with brackets starting at 0% for certain thresholds. For example, for married couples filing jointly, long-term capital gains up to $89,950 are taxed at 0%, while ordinary income in the same range is taxed at 10% or 12%.

How does selling stock with long-term capital gains affect taxable income?

When selling stock, long-term capital gains are added on top of other ordinary income, but they do not push ordinary income into higher marginal brackets. Instead, long-term capital gains are taxed according to their own rates, which are lower than ordinary income tax rates.

What is the significance of the $89,950 threshold for married couples in terms of long-term capital gains?

For married couples filing jointly, long-term capital gains up to $89,950 are taxed at 0%. However, any amount above this threshold will start to be taxed at the next capital gains rate, which is 15%.

Does a higher capital gain push ordinary income into higher tax brackets?

No, long-term capital gains do not push ordinary income into higher tax brackets. Ordinary income is taxed first, and capital gains are taxed separately, based on their own rates, even if your total taxable income increases due to capital gains.

What happens if a long-term capital gain exceeds the 0% threshold by a small amount?

If your long-term capital gain exceeds the 0% threshold by a small amount, only the portion above the threshold will be taxed at the higher rate. For example, if your gain is $1 over the $89,950 limit, that $1 will be taxed at 15%, but the rest remains at 0%.

How do standard deductions affect the taxation of ordinary income and capital gains?

Standard deductions reduce taxable income, starting with ordinary income. In the example provided, Bob and Sally's standard deduction reduced their ordinary income from $60,000 to $32,300, leaving the remainder to be taxed as long-term capital gains.

What is the 'qualified dividends and capital gain tax worksheet' used for?

This worksheet is used to calculate the actual taxes on capital gains and qualified dividends, showing how much of the capital gain is taxed at different rates. It reconciles the different types of income to determine the total tax liability.

Can selling stock affect Social Security or Medicare benefits for retirees?

Yes, selling stock with capital gains can affect Social Security and Medicare. Capital gains can increase your taxable income, making Social Security taxable or increasing your Medicare premiums through the Income-Related Monthly Adjustment Amount (IRMAA).

What is the 'blended rate' when paying capital gains taxes?

The blended rate occurs when part of a capital gain is taxed at 0% and the rest at 15%, depending on the total taxable income. For instance, if Bob and Sally’s capital gain is split across different tax brackets, they will pay a blended rate of both 0% and 15%.

Why is proactive tax planning important when dealing with capital gains?

Proactive tax planning helps avoid unexpected tax liabilities, especially for retirees. Without planning, taxpayers may face higher tax rates, or their Social Security may become taxable or lead to Medicare surcharge penalties.