Mon Jan 7, 2013, 12:38 AM
HiPointDem (20,729 posts)
How capital gains taxes work: cap gains income *under* $400K taxed under the hyped 'top' rate.
First, what was the situation before the fiscal cliff deal?
This was the situation in 2012, with the Bush tax cut extension in place:
This is what would have happened in 2013 when the Bush tax cut extensions sunsetted:
The task (for those who care) is to fill in all those boxes under the new rules. Interestingly, no major media outlet performs this seemingly simple task, which would make things clear to the public.
Instead, the news is filled with puff pieces and doomster end of the world pieces, neither of which, I think, reflect the actual facts.
So we'll have to do it for ourselves as more information comes out.
We can fill in the blanks for top rates, though: they kick in at $400K, (instead of $300K) and the rate is 39.6%.
What about those lower brackets? Here's one tax consultant's explanation:
- Capital gain rates remain at 15% for taxpayers whose taxable income and/or adjusted net capital gain is under the $400,000/$450,000 (single/married filing jointly) thresholds.
- For those with taxable income and/or adjusted net capital gains in excess of those thresholds those capital gains will be taxed at 20%.
- The 0% capital gain rate survives as well and was not mentioned or amended by TATRA.
***OK, so instead of being taxed at 10-20% on long-term capital gains under $100K, those gains will still be taxed at ZERO PERCENT under whatever the new threshhold is. Note that this not only applies to some middle class person who sells his house, it also applies to millionaires, billionaires & ZILLIONAIRES for whatever long-term cap gains they claim under the threshhold.
Heres an example:
Joe files married filing jointly and is retired with no ordinary income. Throughout the year, Joe sells off farmland and has $500,000.00 worth of adjusted net capital gains. Because he has no ordinary income, the adjusted net capital gains are used to determine what ordinary income rates would apply and, thus, what capital gain rates apply. For the first $72,500 of capital gain, Joe will pay a 0% rate on the capital gains. For the amount of capital gains exceeding that amount and up to $450,000.00, the capital gain rate will be 15%, leaving the remainder to be taxed at the new 20% rate. Thus on the $500,000.00, Joe will pay $66,625.00 - an effective tax rate of 13.3%.
Effective rate 13% on $500K. Nice. Sounds like Romney. That's less than I pay on 1/8th the income.
Another twist: If the Bush tax cuts had been left to expire, something called "qualified dividends" would have also expired. "Qualified dividends" was a little scheme which allowed some dividend income to be taxed at low capital gains rates (whereas before bush it had been taxed at regular income rates). If the Bush law had just been allowed to sunset, these 'qualified dividends' would have vanished, leaving all dividends to be taxed as ordinary income. But the fiscal cliff deal stopped that:
The qualified dividend rate was not mentioned by TATRA and will therefore remain tied to capital gain rates. Under previous law, qualified dividends were taxed as adjusted net capital gains. TATRA did not change this, and as such, qualified dividends will be taxed at the same rates as capital gains and in the same manner.
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Response to HiPointDem (Original post)
Mon Jan 7, 2013, 12:56 AM
ProSense (116,464 posts)
The Act preserves the 25%, 28%, 33% and 35% brackets, which were set to rise at the beginning of 2013, and adds a new 39.6% bracket applicable to taxable income exceeding (i) $450,000 for married individuals filing jointly or (ii) $400,000 for individual filers. The income thresholds for each bracket will now be adjusted for inflation. Note that the Patient Protection and Affordable Care Act imposes additional Medicare taxes, also effective on January 1, 2013, of (i) 3.8% upon certain investment income and (ii) 0.9% on certain employee wages and selfemployment income, each of which were previously subject to a 2.9% tax, including the employer portion of the Medicare tax on employee wages. Generally, the additional Medicare tax on investment income applies to the extent that modified adjusted gross income exceeds $250,000 for married individuals filing jointly and $200,000 for individual filers, and the additional Medicare tax on wages and selfemployment income applies above a threshold of compensation income of $250,000 for joint filers and $200,000 for individual filers.
Short-term 43.4 percent. Long-term 23.8 percent.