I had a large long term capital gain recently and I am paying my quarterly estimated taxes. I believed I owed 20% LTCG + 3.8% investment tax + state tax.
When I sent everything to my accountant, he gave me a substantially higher number for my estimated payment. He explained as below, but basically that my LTCG affected my W-2 ordinary income rate.
Doing a little more research makes me question whether he is right. Most things I can find on the internet says ordinary income fills the tax level buckets first, and then capital gains rate is calculated after that.
His explanation (based on approximate numbers for my situation):
"Let’s assume you had $700,000 of ordinary income, which is all W-2 income. That would put you in the 37% bracket, but you wouldn’t pay 37% on all $700,000, you would only pay 10% on the first $22,000, then you would pay 12% on the next $67,450, and so on. Thus, your blended average would be closer to 28%.
Now a different assumption, if we assume you have $700,000 or ordinary income plus $2,000,000 of capital gain income. Your total taxable income is now $2,700,000. So even though the capital gain income itself is taxed at a different rate, the W-2 income is bumped up the tax tables by the capital gain income, giving the W-2 income a much higher blended average tax rate."
Or is this a function of "Capital Gains Bump Zones" where Kitces says "In this case, additional ordinary income in the 12% tax bracket was taxed at 27% because the income also drove up the capital gains tax liability by pushing more gains out of the 0% bracket."
https://www.kitces.com/blog/long-term-c ... in-0-rate/
https://actuaryonfire.com/mapping-the-c ... ne-part-1/
It's all very confusing to me. I can totally understand how the capital gains can be taxed at higher levels because of ordinary income, but not how ordinary income can be taxed higher by LTCG, if the tax buckets are filled first by ordinary income.
What say the Bogleheads?
When I sent everything to my accountant, he gave me a substantially higher number for my estimated payment. He explained as below, but basically that my LTCG affected my W-2 ordinary income rate.
Doing a little more research makes me question whether he is right. Most things I can find on the internet says ordinary income fills the tax level buckets first, and then capital gains rate is calculated after that.
His explanation (based on approximate numbers for my situation):
"Let’s assume you had $700,000 of ordinary income, which is all W-2 income. That would put you in the 37% bracket, but you wouldn’t pay 37% on all $700,000, you would only pay 10% on the first $22,000, then you would pay 12% on the next $67,450, and so on. Thus, your blended average would be closer to 28%.
Now a different assumption, if we assume you have $700,000 or ordinary income plus $2,000,000 of capital gain income. Your total taxable income is now $2,700,000. So even though the capital gain income itself is taxed at a different rate, the W-2 income is bumped up the tax tables by the capital gain income, giving the W-2 income a much higher blended average tax rate."
Or is this a function of "Capital Gains Bump Zones" where Kitces says "In this case, additional ordinary income in the 12% tax bracket was taxed at 27% because the income also drove up the capital gains tax liability by pushing more gains out of the 0% bracket."
https://www.kitces.com/blog/long-term-c ... in-0-rate/
https://actuaryonfire.com/mapping-the-c ... ne-part-1/
It's all very confusing to me. I can totally understand how the capital gains can be taxed at higher levels because of ordinary income, but not how ordinary income can be taxed higher by LTCG, if the tax buckets are filled first by ordinary income.
What say the Bogleheads?
Statistics: Posted by araomd — Sat Sep 14, 2024 9:08 am — Replies 15 — Views 1042