How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Merlo Your Own Question

Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
Type Your Tax Question Here...
Merlo is online now
A new question is answered every 9 seconds

How do capital gains and losses affect taxable income Give

Customer Question

How do capital gains and losses affect taxable income? Give an example. PLease give a very detailed, easy-to-understand answer. Thank you
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.

HelloCustomer

 

Basically there are two types of capital gains -- short term gains (assets held one year or less) and long term capital gains (assets held one year or more).

 

Short term capital gains are basically taxed at ordinary income tax rates, meaning that your short term gains would simply be added to your other ordinary income for the year, and you would pay the appropriate taxes on your total income, based on the tax bracket that you are in.

 

So as an example, say you held a stock for 6 months and sold it for a gain of $1,500. If you also had a regular job and had earnings reported to you on a W-2 form for $30,000, then your total ordinary income for the year would be $31,500. You would then apply your standard deduction amount and your personal exemptions allowances, and the balance would be your taxable income. You would pay taxes on this amount at ordinary rates based on your filing status (single or married, etc) and the appropriate tax bracket that you fall into. The same would apply if you had a short term capital loss. In the same example, if you held a stock for 6 months and sold it for a loss of $1,500, then your total ordinary income for the year would be $28,500 (your salary less the $1,500 loss).

 

Long term capital gains have their own special tax rates which are figured separately from the tax you owe on your ordinary income. Currently the maximum amount you would pay on a long term capital gain is 15%, and some of your gains may even qualify for zero% tax. When you report your long term capital gains using Schedule D, there is a worksheet that helps you to calculate the tax due.

 

If you have both long term gains and long term losses in the same year, then you would first use your losses to offset any gains that you had, however, your net loss from the long term sales cannot exceed $3,000 in any one tax year. If your losses exceed that amount, you would carry those losses forward to use on future tax returns.

 

As an example, say you had one stock which you held for two years and sold that stock for a gain of $2,000. In that same year say you had another stock which you also held for 2 years and you sold that stock for a loss of $6,000. You would take your long term capital gain of $2,000, less your long term capital loss of $6,000, leaving you with a net loss of $4,000. Your loss limit for any one year is $3,000, so that is the amount of the loss you would report. The remaining $1,000 loss would be saved and applied to the following year's tax return.

 

If you ended up the year with a taxable long term capital gain, then the tax on that gain would be calculated using the worksheet provided with Schedule D. But basically the way it works is as follows:

 

If your taxable income (income from wages, short term gains, etc) including your long term capital gains is below the level on which you would pay at the 25% rate, ignoring the fact that some of your income is capital gains, then your tax on the long term capital gains would qualify for the zero% tax. Once your taxable income falls into the 25% range, then the portion of your taxable income from the long term capital gains is taxed at a flat 15%.

 

This is confusing, so I will try to give you an example to help explain how this works.

 

Lets's assume you are married and filing a joint return and you decide to sell a stock that you have owned for the past five years, and your gain on that stock is $20,000. Let's also assume that you and your husband had regular earnings of $32,000 each from your employment. This would give you a total income for the year of $84,000.

 

As a married taxpayer you would be allowed a standard deduction of $10,900 and you would each be allowed a personal exemption amount of $3,500, leaving you with a taxable income of $66,100. Of this amount, $20,000 is eligible to be taxed at the long term capital gains rates and the rest is taxed at ordinary income tax rates.

 

Below are the tax brackets for the 2008 tax year for couples filing as married:

 

  • 10% on the income between $0 and $16,050
  • 15% on the income between $16,050 and $65,100; plus $1,605.00
  • 25% on the income between $65,100 and $131,450; plus $8,962.50
  • 28% on the income between $131,450 and $200,300; plus $25,550.00
  • 33% on the income between $200,300 and $357,700; plus $44,828.00
  • 35% on the income over $357,700; plus $96,770.00

 

These are the rates that are charged on ordinary income and not on capital gains, BUT the same brackets are used to determine how much of your capital gains qualifies for the zero% rate.

 

As you can see from the above table, any ordinary taxable income which you would have that was $65,100 or less would still have 15% as the top tax bracket. In your case, your total taxable income is $46,100 from ordinary income and $20,000 from long term capital gains. The $46,100 of ordinary income would be taxed at the rates shown in the above table. You then still have a "cushion" of $19,000 before any more of your "ordinary income" spilled over into the 25% tax bracket. ($65,100 maximum 15% bracket limit less $46,100). That means that you can apply that $19,000 to the first part of your long term capital gains, and that $19,000 would qualify for zero% tax. The remaining portion of your long term capital gains ($1,000) is then taxed at a flat rate of 15%.

 

This information is based on the current tax rules and rates for the year 2008. These rates have changed historically and will likely continue to do so in future years.

 

If this was helpful, please press the Accept button. Positive feedback is also appreciated.

 

Thank you.

 

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.