Capital Gains & Tax Brackets

Episode Transcript

Speaker 1 (00:00):
Bone lines. They're open for you right now. If you've
got a question for our retirement planning professionals from COSS
Financial online Costs Financial dot com. That's coss k l
a as Financial dot com. Great website and resource to
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(00:24):
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dot com. As much as hell. Phone number to get
on the air six so eight three two one thirteen ten.
That's six so eight three two one thirteen ten. We'll
get you on the other the retirement planning professionals from
COSS Financial, of course, you can always call their off is.
Make an appointment at Coss Financial. It's complementary six oh
eight four four two five six three seven Again no

(00:44):
charge for the financial get to know you appointment at
Costs Financial. It will be complementary to you. Again their
number six O eight four four two five six three seven.
Are gonna be talking about taxes and not all taxes
are the telling something A lot of folks are. Of course,
that's true. Not all taxes are the same. We're going
to get some details in joining us this morning from
Class Financial, CJ Closs and Jenny Dody and CJ. Welcome

(01:07):
to the show. Good to hear from you.

Speaker 2 (01:08):
How you been I having good? Sean? How about you?

Speaker 1 (01:11):
I'm doing really good. Jenny, Welcome to the program. This
is your first show, isn't it?

Speaker 3 (01:16):
Yes?

Speaker 2 (01:16):
It is. Hi.

Speaker 3 (01:17):
Thank you for having me.

Speaker 1 (01:18):
It's great to have you and great to have you
along for the show. And as mentioned, we've got a
fantastic program ahead. A couple of things to keep in
mind as we do the show. Don't forget love phone calls,
love questions, if you got anything retirement related. Love to
have you join us this morning six so eight, three, two, one,
thirteen ten. Don't forget as well the class quiz question
link will be doing one of those again this morning.
Your chance to win a fantastic prize this week, our

(01:39):
friends from Class Financial have provided a twenty five dollars
gift card to Jersey. Mike's tell you a little bit
later on the program how you can win that gift card.
Little tip though, if you pay close attention, oftentimes both
the question and answer to the class quiz question we
come up during the program, and before we get to
this week's topic, let's actually take a look back last
week CJ to our show and get the question and
answer there to the class quiz question of the week.

Speaker 2 (02:03):
Yeah, thanks everyone for listening as you do each and
every week, and congratulations to our winner from last week,
who was Paul of Monona. And Paul accurately answered this
truer false question from last week, which was contributions to
a health savings account are considered triple tax advantage savings vehicles.
It was a true or false question, and Paul accurately

(02:25):
answered that as true. HSA's for short health savings accounts
are actually triple tax advantage savings vehicles, one of the
most tax advantage account types in the IRS code. So
great job, Paul, and I would just encourage everybody listening
closely this week because we'll do another one at the
end of the show.

Speaker 1 (02:43):
Should be a should be a great program ahead, and
don't forget that last show that we did. If you
missed any part of it you want to listen back,
you can definitely head on over to classfinancial dot com.
That's Closs klaasfinanci dot com. You listen back to the
previous shows podcast. You can also subscribe there as well,
right at class financial dot com. So today's show, we're
going to be talking about things for listeners when it

(03:04):
comes to different taxes that apply to different types of earnings. Jenny,
what do folks need to know here?

Speaker 2 (03:12):
Yeah?

Speaker 3 (03:13):
Thanks, Sean. Yeah, today we're gonna we intend to help
our listeners understand the difference between income taxes and cattle
gains taxes in the US tax Code. However, before we
summarize those differences, we need to provide everyone with a
fifty thousand foot view of this topic so we can
better understand what we're talking about as we get further
into this show and the US tax Code. The term

(03:33):
an earnings is generally understood to fall under the broader
concept of gross income. Now, the Internal Revenue Code, Section
sixty one defines gross income as all income from whatever
source derived. So this is a very broad and comprehensive definition,
and it includes, but isn't limited to, the following list

(03:53):
of items. First, compensation for services. This is what most
people think of as earning. It includes wages, salaries, tips, commissions, fees, bonuses,
and other taxable employee pay. It also includes income from
self employment, such as that earned by freelancers, independent contractors,
or small business owners, and this category even includes bartering. Second,

(04:18):
we have income from a business. This is the income
generated from operating a business minus the cost of goods
sold or said another way. Attractions against business income are
called deductions and taken for expenses that are ordinarily and
necessarily paid in the course of business. Next, gains from
dealings and property, also known as capital gains. This category

(04:41):
includes profits from selling property such as stocks, bonds, or
real estates. Then we have interest and dividends. Most people
are familiar with the fact that income received from investments
and bank accounts is taxable rents and royalties. This means
grows income from renting out property or from the use
of a copyright our patent, which is taxable. Again, deductions

(05:04):
come into play here. Pensions and annuities are taxable, and
distributions from retirement accounts are also taxable, such as pre
tax iras or flour one k's that were not previously
taxed forgiven debt is usually considered taxable income. This can
be a surprise for people The tax jargon for this
category is income from discharge of indebtedness. Lastly, we have

(05:29):
distributive shares of partnership, gross income passed through, income from
s corporations, and income from an interest and in a
state or trust, which are all taxable. I hope you
can appreciate that there are so many types of income
and generally speaking, all income is taxable unless specifically excluded
from tax by law.

Speaker 1 (05:50):
That is amazing. As we talked this morning with Jenny
Doity and CJ Closs of cost Financial, don't forget. You
can learn more online Cossfinancial dot com. That's class k
l Aasfinancial dot com. Their telephone number six soh eight
four four to two five six three seven no charge
for that initial gets to know you appointment dech claws Financial.

(06:10):
It will be complimentary to you. CJ. Let's pull you
in on this part of the conversation. Fantastic overview there
from Jenny. Let's talk then about how this all then
applies to different types of earnings.

Speaker 2 (06:24):
Yeah, good point, Sean. So before I do that, I
do just want to let our listeners know because you
might be going Jenny doty, this is a new voice.
So many of you know, about a year ago we
decided to bring tax preparation and some tax planning services
in house, and Jenny is are higher. That is a
culmination of that dream becoming a reality. So Jenny actually

(06:44):
does tax prep. She's in enrolled agents with the IRS,
and so she does tax prep services for our clients.
Now that's not a requirement. Our clients don't have to
work with her, but it's certainly nice when the right
hand knows what the left hand is doing, so to speak. So, yeah,
Jenny just gave us a really good rundown there of
kind of high level what are these different income categories?

(07:07):
And while certainly it's important to understand the broader concept
of earnings and gross incomes, that's not the main point
of our show today. The truth is that our US
tax code is unbelievably complex and there's a lot more
to understand than just gross income. But we don't have
time for everything today. Instead, we want to focus on
something that a lot of Americans don't realize or understand,

(07:30):
such as did you know that there are two different
primary brackets that could apply to your taxable income based
upon the type of earnings you receive in a year. Yes,
there are two different brackets. Most people have heard of
this kind of like, oh, I've heard that the US
tax code is a progressive tax code. The more income
you have, the more that you pay in taxes, YadA, YadA, YadA.

(07:52):
A lot of people don't know how that calculation works,
but they get the idea. What we're here to say
today is like, but did you know there's two of them,
two different brackets. So the two different brackets are ordinary
income tax brackets and long term capital gains tax brackets.
So let's dig into each of these a little bit.
Ordinary income tax brackets. This is the most common type

(08:14):
of tax bracket and applies to the majority of a
person's earnings. This includes so remember what Jenny was talking about.
So these items I'm about to tell you are the
ones that fall into the ordinary income tax brackets. It
would be wages, salaries and tips, interests from a savan's
account form like on Form ten ninety nine I in
short term capital gains from assets held less than one year,

(08:38):
business income from self employment or sold proprietorship, rental income
for most types of rentals, pensions, and retirement account distributions.
There are seven different tax rates So think about it
this way. Those categories I just told you all fall
into the quote unquote ordinary income tax bracket. Okay, what

(08:59):
is said ordinary income tax bracket? Well, there are seven
different tax rates for ordinary income, which are progressive. This
means that as your income increases, it is tax at
a higher rate. However, all income first fills the lowest bracket,
So even if your income is high, there will be
portions of that income that are taxed at the lowest rates.

(09:22):
How much will be taxed at the lower rates is
a byproduct of how much of each bucket you fill
up or bracket that you fill up, and the capacity
or size of each of the brackets is specified in
the tax rules set by Congress. Additionally, the specific income
thresholds for each bracket depends on your filing status, whether
you're single, married, filing jointly, head of households, so on,

(09:43):
and so forth. For example, for the tax here twenty
twenty five, the rates those seven different rates we were
talking about are ten percent, twelve percent, twenty two percent,
twenty four, thirty two, thirty five, and thirty seven. Each
of those tax it's then has a specified bracket or
range of income amounts that corresponds to it. So now

(10:07):
again the reason we didn't want to get into each
kind of range is because there's different ranges depending upon
your filing status. So it just gets really really complex.
I don't want you to worry about that for now,
and I want you to focus on as Okay, there's
large portions of my income that fall into these ordinary brackets,
and those ordinary brackets are progressive and have ten and

(10:29):
have seven different categories of rates, and each bucket has
to be filled up till you get to the next
buck So there you go. There's the ordinary income tax
side of the equation.

Speaker 1 (10:43):
Talking this morning with CJ. Closs and Jenny Doughty. They
are our retirement planning professionals from Class Financial Online, Class
Financial dot Com. That's Class K L A A S
Financial dot Com DOEVI at number six so eight four
four two five six three seven. So, CJ, we talked
about the ordinary income tax brackets. What about those capital
gains tax brackets?

Speaker 2 (11:02):
Yeah, so this is the piece that most people are
somewhat unaware of. So as we discuss, gains from dealings
and property are considered capital gains. The tax rates for
these gains are different depending on depending upon whether they're
considered short term or long term. So short term capital
gains these are taxed at your ordinary income tax rates.

(11:24):
We mentioned it before. Short term capital gains fall into
the ordinary income tax bracket, just like the majority of
your other income. So think of it if you if
you buy a stock and then you sell it eleven
months later for a gain, the profit is subject to
the ordinary income tax brackets. Well, what about long term
capital gains? So again again, same example, I buy a

(11:45):
stock and then I sell it thirteen months later, and
there's a gain in that sale. This is where you
get a separate set of brackets and preferential tax rates.
So long term capital gains are gains from selling assets
you've held for more than one year. That's the key here.
Qualified dividends are a specific type of dividend payment from

(12:05):
certain domestic and foreign corporations. These are often tax at
those same preferential lower rates as well. Okay, so now
that we've talked about okay, so what falls into these
capital gains tax brackets. It's kind of this long term
capital gains more than twelve months, and then secondarily these
qualified dividends. There are currently three different tax rates for

(12:28):
long term capital gains and qualified dividends. Okay, so those
three different rates are zero, fifteen, and twenty, So everybody
should be thinking, like, wait a minute, ordinary income had
seven different rates that topped out at like thirty seven percent.
You're saying that this type of income, capital gains and
qualified dividends are zero, fifteen, and twenty. That's right, Everybody

(12:51):
pay close attention here. The income thresholds for these rates
are also based on your filing status and are separate
from the ordinary income tax brackets. For example, a single
filer might have a zero percent capital gains rate on
a certain amount of income, a fifteen percent rate on
the next portion, and a twenty percent rate on the
higher portion. It's also important to mention here that a

(13:12):
gain is a calculated amount. It rarely equals the sale
price of an asset. So just remember, if I sell
a stock for one hundred thousand dollars, that's not my gain.
It's the gain from the difference of what I bought
it at and what I sold it at, assuming I
held it for more than twelve months. So this is
kind of setting the stage. Jenny's going to dig in

(13:32):
here in a moment but we're setting the stage for Okay,
two different, very different brackets here, and the capital gains
tax bracket and the qualified divinence bracket is significantly more
tax preferred. So Jenny in a moment here's going to
dig into how does all of that work and get
calculated together on your tax return.

Speaker 1 (13:51):
Really interesting stuff and we're going to get into that
in just a moment with Jenny Doty and of course CJ.
Closs our retirement planning professionals from class financial website, Coss
financial dot com. That's Coss k l a A s
financial dot com. Great resource. Learn more about Cossfinancial. They're
telephone number six oh eight four four two five six
three seven. No charge for that initial get to know

(14:12):
you appointment at Loss Financial. It will be complementary to you.
More of money in Motion with Coss Financial. It comes
your way next right here on thirteen ten. Wu ib
A getting a breakdown this week of the difference when
it comes to earnings, things like income taxes and capital
gains taxes. Great program. If you missed any part of
that first segment, or you want to listen back or
share the program, of course, get head on over to

(14:32):
Cossfinancial dot com. That's Coss k l A A S
Financial dot com. They're telephone number six oh eight four
four two five six three seven. No charge for that
initial gets to know your appointment at COSS Financial. It
will be complementary to you again their number six O
eight four four two five six three seven. Talking this
morning with CJ Closs and Jenny Dody and Jenny is

(14:52):
as CJ was talking earlier, just a little bit about
some of the different brackets and other things, can you
kind of explain how income stack works when it comes
to ordinary income and then capital gains income as well.

Speaker 3 (15:06):
Yes, certainly, income stacking is a critical concept to review
when it comes to understanding the brackets and the rates
that will apply to each type of income. First, it's
important to convey that while there are separate tax brackets
for capital gains, capital gains are not taxed in isolation
of all the other types of income that may be
in your tax return. All the types and quantities of

(15:29):
income are aggregated into one large category in order to
determine the extent or the totality of your taxable income.
Note that I'd say taxable here. There are several measures
of income on your tax return. Once we drill through
most of them the ones we mentioned at the start
of the show, and potentially apply many deductions along the way,

(15:52):
we arrive at a specific measure of income called taxable income.
So we can think of income stacking visual First, we
stack vertically all the sources and quantities of income that
will be taxed at ordinary income tax rates. Next, on
top of that, we stack all the income that qualifies

(16:12):
for those preferential capital gains rates. So here's a quick
explanation of how that works. In a little bit more detail,
your ordinary income can be thought of as the base
layer of your stack. This includes your wages, salaries, tips,
business income, and short term capital gains. This income is
always taxed first using the progressive ordinary income tax brackets

(16:36):
with the seven different rates that we mentioned ten, twelve, twenty,
two percent, and so on. Next, after your ordinary income
fills up the tax brackets, your long term capital gains
and qualified dividends are stacked on top. We could say
is to continue to continue to think visually about taxable income.

(16:56):
As we've mentioned already, long term capital gains and qualified
divists dividend income are subject to their own separate tax brackets.
The zero, fifteen, and twenty percent we mentioned our earlier,
But the starting point, so to speak, for your capital
gains will be the next dollar. After all your ordinary
income is added up. So to work with an example,

(17:18):
if you had eighty thousand dollars of income from your
job and twenty thousand dollars in capital gains from stock
you sold, your capital gains will bring your tax bil
income up to one hundred thousand dollars. Twenty on top
of eighty is one hundred. Now, the first capital gains
tax bracket, which we will go over in detail in
a moment, goes up to about ninety six thousand dollars

(17:40):
for a married couple. It's not exactly ninety six thousand,
but to create some simple math, let's assume for a
moment that it is. In our example, the capital gains
stacked on top of the ordinary income that sit from
eighty thousand to ninety six thousand dollars will be taxed
a zero percent. The last four one thousand of the

(18:00):
taxable income is beyond the zero percent capital gains tax bracket,
and it reaches into the fifteen percent capital gain tax bracket.
So only that four thousand dollars of capital gains will
be taxed at fifteen percent. Take that in for a second.
I think it can too often be quick to bemoan

(18:22):
taxes without fully understanding the places in the tax code
that really benefit us. So in our example, we just
realize twenty thousand dollars in capital gains and will only
pay fifteen percent federal tax on four thousand dollars of
those capital gains. If we do the mass, that means
we pay just six hundred dollars in tax on twenty
thousand dollars of capital gains. And that's an average tax

(18:44):
rate of three percent. That might merit some appreciation. Of course,
I am setting aside for another time the end of
the conversation about the eighty thousand dollars of taxable ordinary income.
The key rule is that your long term capital gains
don't push your ordinary income into higher tax brackets. Your
ordinary income determines where your capital gains begin their own

(19:07):
journey of the tax bracket.

Speaker 1 (19:09):
Really good illustration of a very complex topic. Talking this
morning with Jenny Doty and CJ. Closs of COSS Financial,
they are our retirement planning professionals. Of course, you can
learn more online. The website Coss financial dot com. That's
Coss k l a A S Financial dot com. They're
tel for number six soh eight four four two five
six three seven. No charge for that initial get to
know your appointment tech Loss Financial. It will be complimentary

(19:31):
to you again. Their number six oh eight four four
two five six three seven looks into our conversation with
CJ and Jenny. We will do that next as Money
in Motion continues right here on thirteen ten wib I
talking with our retirement planning professionals c J. Closs and
Jenny Doty. Of course they come to us from Class Financial.
The website Coss financial dot com. That's Coss k l

(19:51):
a A S Financial dot com. Tel Number six O
eight four four two five six three seven. No charge
for that initial gets to know you appoinment tech Coss Financial.
It will be complimentary to you again. They're number six
so eight four four two five six three seven. Talking
about a pretty complex topic, and what's been great about
it is really nice work illustrating kind of how this
stuff works in the real world. And CJ. As we

(20:13):
kind of get through this topic and really helping folks
understand it. Let's let's kind of get into kind of
the how much far as earnings or income you need
for a calendar year and whether it let ordinary income
or capital gains income to really reach different rates within
each of those brackets.

Speaker 2 (20:32):
Say, first off, great job, Jenny, I mean, this stuff
is complicated, and certainly I almost wish we could do
the show like with a whiteboard in a classroom, rights,
because it would certainly be easier that way. That's why
we talk often in visual terms, right, we say fill
up a bucket, because hopefully that helps our listeners visualize
in their own brains what it is that we're trying
to explain. But yeah, while we have helped listeners understand

(20:56):
that there's two different brackets that could apply to your
earnings and a calendar year, depending upon them the source
of that income, between the ordinary income or long term
capital gains tax of income, we haven't told you the
brackets themselves. So unfortunately, like everything in the US tax code,
there are brackets within the brackets. So set another way,

(21:17):
while there are two primary different brackets that could apply
to your income depending upon the source of that income,
that's that ordinary income tax bracket the long term capital
gains tax bracket. There are also various brackets within those
two brackets depending upon your filing status, so filing status,
believe it or not, there are a total of five

(21:39):
different filing statuses that include the following. Single is one
Married filing jointly is another category. Married filing separately is
a third category, head of household is a fourth category,
and qualifying widow or widower with a dependent child is
a fifth type of category. So there's five different categories

(22:02):
or what the IRS calls filing statuses. So as you
can imagine, we don't have time to describe why there
are five different filing statuses, but to keep things as
simple as possible, we're going to focus on describing the
tax brackets that apply to various levels of ordinary income
and long term capital gains taxable income for couples who
file as married filing jointly. So we're just gonna we're

(22:24):
just going to focus on that bracket now again. If
you are not married filing jointly, what I'm about to
explain to you is not your ranges, but you can
certainly call us up and we can give those to you,
or you can google the different ranges for different filing
status So again, for a couple married filing jointly in
the year twenty twenty five, the brackets for ordinary income

(22:46):
sources are ten percent for taxable income from zero to
twenty three, eight hundred and fifty twelve percent for taxable
income from twenty three. I'm going to round these numbers everybody,
twenty four thousand to ninety seven thousand, twenty two percent
tax on income, taxable income between ninety seven thousand and

(23:08):
two hundred and seven thousand, twenty four percent on two
hundred and seven thousand to three ninety five, thirty two
percent on income from three ninety five to five oh one,
thirty five percent on income from five oh one to
seven fifty two, and finally thirty seven percent on taxable
income over seven hundred and fifty two thousand dollars of income.

(23:29):
So think visually, as Jenny was just telling you before.
Each of those are buckets. The first twenty four thousand
dollars that a married couple filing jointly earns in a
year will be taxed at ten percent. That's the taxable
income portion that falls into that ordinary income bracket. Then
the next twenty four to ninety seven thousand is that twelve,
so on and so forth. So if somebody is at

(23:52):
a cocktail party, I'm just gonna I'm gonna be like
the DeBie Downer here and says, oh, we pay thirty
five percent tax on our income. Well, two things. They're
really just trying to tell you how much money they make.
By the way, so that's a little off putting if
you ask me. But number two, rarely, I mean I'm
talking rarely upon, rarely upon, rarely would they actually be

(24:14):
paying thirty five percent average across all of that income.
It's only the money over five hundred and one thousand
dollars that they're paying that thirty five percent on. So
you get my point. Wink wink. They're making over five
hundred grand and they're just trying to tell you that.
So if you were to actually say, hey, if somebody
makes five hundred and ten thousand dollars and they're in
the thirty five percent marginal income tax bracket, what would

(24:37):
their average tax be? It is way lower, everybody. We're
talking twenty two to twenty four percent, not thirty five percent.
That would be their average tax across at all that
ordinary income. Okay, and then finally, for the Taxier twenty
twenty five. The brackets for long term capital gain sources.
For a copy couple that is filing as married filing jointly,

(25:00):
those rates are zero percent for a combined taxable income
of ninety up to ninety six thousand, seven hundred, or
i'll just round ninety seven thousand, fifteen percent for a
combined taxable income nine of ninety seven thousand up to
six hundred thousand dollars, and then twenty percent for a
combined taxable income of over six hundred thousand dollars. So

(25:24):
you can see why for those who are listening, you
can see why. You'll often hear people say there's a
fifteen percent capital gain tax rate and then just kind
of say it quickly because for most Americans who have
capital gains that don't know what they're really talking about exactly,
they're going to fall into that fifteen percent range because
it's such a huge range. It's it's taxable income of

(25:48):
ninety seven thousand to six hundred thousand dollars, So most
people are going to be paying that fifteen percent rate.
But as Jenny just gave in her example earlier, and
I want everybody to pay special attention to this. If
you are strategic, you can actually have large portions of
your capital gains tax long term capital gains tax are
qualified dividends tax that zero if you manage it properly

(26:11):
and if you're able to. And then there is this
other thing I just want to mention at the very
end of our show here, because I know our CPAs
and then rolled agents out there going yeah, CJ. But
but but we are aware there's this thing called KNIT
net Investment income tax. So for those who don't know,
there is this other overlaying component known as KNIT where basically,
if you're taxable, your AGI gets high enough or your

(26:35):
tax on income gets high enough that you're going to
actually hit this other small tax known as NIT that
adds on an extra couple percentage to these higher rates.
But that's too much for this show today. I just
we're starting to combine too many concepts into one and
one another.

Speaker 1 (26:49):
When we talk to as we talked some morning with CJ.
Closs and Jenny Doti, our retirement planning professionals from Class
frantele so we talk about this stuff and the complexities.
One of the important things is working out a plan,
having that strategy and of course working with folks that
understand all of the different nuances to help you develop
that plan and strategy. It's a great day to start
that relationship, start that conversation at COSS Financial. Of course,
you can learn more online the website cossfinancial dot com.

(27:12):
That's Coss k l aas Financial dot com. They're telephon
number six oh eight four four two five six three seven.
No charge for that initial get to know you appointment
tech co Loss Financial. It will be complementary to you
again their number six oh eight four four two five
six three seven. Hold on to the number two. It's
time now for the class quiz question of the week.
It works like this. In just a moment, I'll ask
you the class quiz question of the week. You will

(27:33):
then have thirty minutes from the end today's program to
call the Class Financial office right here in Madison at
six oh eight four four two five six three seven.
If you are the first call correct answer, win this
week's prize, which is a twenty five dollars gift card
to Jersey Mikes. This week's class quiz question of the
week is this true or false? Long term capital gains
are gains from selling assets you've held for more than

(27:56):
one year. Telephone number six oh eight four four two five,
six three seven, let's call it correct answer when the
twenty five dollars gift card to Jersey Mike's never forgets. Well,
that's Class Financials office right here in Madison, CJ. It's
always great chatting with you, Jenny. Great to meet you.
Look forward to talking again real soon.

Speaker 2 (28:11):
Thanks Sean, thank you, thanks Jenny.

Speaker 1 (28:14):
Of course we've got news coming your way next right
here on thirteen ten WIBA