Retirement Answers

Jacob: 00:00

Can capital gains push you into a higher tax bracket? That's the question we're going talk about today here on the show. Welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host here as always.

Jacob: 00:11

I'm a certified financial planner and the owner of retirement planning firm where we help people just like you plan smarter so you can retire better. So today, want to address capital gains and how it actually works in regards to your tax brackets and how this, interacts with your other ordinary income you might have. I also want to share with you some things that don't show up on paper immediately that you might want to look out for as you're realizing capital gains, whether they're short term or long term. So let's just go ahead and jump into this and and get started. So the first thing we've got to know before we go any further is that there are two different types of capital gains that we can have.

Jacob: 00:46

We've got short term gains and long term gains. Now, this only applies to your brokerage accounts, like a joint investment account, or an individual investment account, or a trust account, or a business brokerage account, or even real estate. Okay, this does not apply to IRAs or Roth IRAs. Those are tax sheltered accounts and there's no such thing as short or long term gains within 401ks, IRAs, 403Bs, anything like that. So that's the first thing to know is this only applies to brokerage accounts and real estate transactions.

Jacob: 01:15

Now, we have two different types, short term and long term. Short term gains whenever you sell something and it has made money before you held it for one year. A long term gain is whenever you've held an investment for over three sixty five days, therefore it receives long term capital gains status. Now, whenever you actually have a short term gain, you are going to pay normal income tax rates on that gain. So if you've got a holding that you've held for three sixty days, and it's made money and now you're trying to sell it, well, what?

Jacob: 01:43

The difference in the tax rate on that could be big if you sell it at three sixty days versus three sixty six days. Okay? So you might want to hold it that extra six days so that you can receive long term capital gain treatment and I'll share what those tax brackets are here in just a moment. But for short term gains, it is treated as normal income and flows onto your tax return and just gets stacked on top of any other income you have and treated like normal income. Now, your long term capital gains, those are taxed in a more favorable manner.

Jacob: 02:11

In fact, there's three different tax rates you need to know about here for long term capital gains. There's 0%, there's 15%, and there's 20 brackets. Now, which bracket you fall into here is going to be dependent on what other income sources you have. So, you might be at the 0% bracket, you might be at 15, you might be at 20%. And I've talked about previously here on the show, tax gain harvesting where you intentionally sell something that's made money at a long term capital gain and do so in a way that you can pay a 0% tax rate on those long long term gains.

Jacob: 02:41

So that's a big deal, right? Because you get to take money that you did not have before, the gains on your investment and pay no tax on that if it's in a brokerage account. So that's that's a next level strategy. I like to do that with my retired clients. It's a huge thing that they can save tons of money.

Jacob: 02:55

If you want to go listen to a specific episode on tax gain harvesting, I'll have that linked down in the description for you below. So that's the difference there in between short term and long term, you got to hold it for longer than one year in order to get the long term treatment and the tax rate on that is either zero, fifteen, or 20%. If you want to see a an important numbers document, I've shared this with many of you before, but if you do not have that yet, and you want a copy of this to help make sense of of what these brackets are and where they start and stop, just go and click on that link down in the description below. I'll share that with you freely. Just fill out that quick form.

Jacob: 03:27

It'll get sent over to you immediately in an email. So I encourage you to get that because it's a really helpful resource. Now, whenever we start to think about, can we be pushed into a higher tax bracket here with capital gains? The answer initially is, is no, you cannot push other income into a higher bracket because all of your capital gains, whether they're short term or they're long term, they just get stacked on top of any other income you might have. So if you've got $60,000 of earned income this year, and you want to realize something that has a capital gain of $10,000 that $60,000 that is added first, and then you throw the $10,000 gain on top of it.

Jacob: 04:07

Okay, so you're not taking the $10,000 gain and adding that first and then adding your other income on top of it. The capital gain gets added at the end, not the beginning. So that's important to know because the $60,000 that's going to be at the same rate it was before the capital gain no matter what. The capital gain itself, that could be at zero or 15%, depending on where those thresholds are and your filing status, whether you're single or married or married filing single. So, just know that your capital gains stack on top and sit on top of your other sources of income, like ordinary earned income, IRA distributions, social security income, anything that might be there that's not a capital gain.

Jacob: 04:46

All of those things are factored in first and then gains are added on top afterwards. So if we just look at a quick example of how this would work, let's just say that we've got a retired couple and if you're single just, you know, apply this differently based on your single tax filer status. But let's say we've got a married couple, they're both 62, it's twenty twenty five, they've earned $80,000 so far as normal income. However, they got their IRA distributions or actual work doesn't really matter to me, but they've got $80,000 of income. And they then want to realize, let's say, a $100,000 of capital gains in their brokerage account on top of that.

Jacob: 05:23

So their gross, gross, gross income would be like $180,000.80000 bucks is ordinary income, the other 100 is capital gain. Now, whenever we look at how this actually works in terms of the tax return, the first thing we're going to do here is we're going to subtract out their standard deduction. Okay, that standard deduction does not get applied to the capital gains portion, it gets applied to the normal income, the 80,000. So if we have $80,000 of income, all right, and we subtract out 31,500, which is the standard deduction for someone who's under 65 here in 2025, now we've got $48,500 of normal income that's quote taxable income, because we've already subtracted out that standard deduction. So we go from $80,000 of earned income down to 48,500.

Jacob: 06:13

So 48,500, now we have this $100,000 of capital gains that gets added on top of that. So $148,500 that's our true taxable income. So the 48,500, that original amount that's taxable that's earned, that flows through the tax brackets like normal, the first 23,000 or so, that's a 10% rate, married filing jointly, the next, however much above that up to 96,000, that's at the 12% rate here in 2025. So that remains unchanged. That would have happened the same way without any other capital gains realized, but the capital gains portion of this is where it gets kind of interesting.

Jacob: 06:51

So remember, we've got $100,000 of capital gains, but our total adjusted gross income or total taxable income, I'm sorry, is 148,500 since we've already subtracted out the standard deduction. So 148,500, remember that number. So here's the key. The first 48,000 of that is being taxed as normal income. Since this is a long term gain, the 100,000 that's left over, okay, that is going to be taxed at either zero, fifteen, or 20%.

Jacob: 07:23

Now, here's the catch. Not all of that is going to be taxed at zero, fifteen or 20%. It actually works up the brackets as we reach a certain level. So again, this is on that document that I can send you. So click that link below to get it.

Jacob: 07:37

But for married filing jointly here in 2025, the 0% long term capital gain rate, that bracket goes up to $96,700 of taxable income. So if you just want to follow me here for a second, if we use 96,700, that's married filing jointly here this year in 2025, that's the most taxable income we can have before we crest that and go into the 15% long term bracket. So if we've got 96,700, if we subtract out the $48,500 that is normal income, that's using up the first amount of this $96,000 bracket, that leaves $48,200 left that there's room for at the long term rate at 0%. Okay. So we have $100,000 total of long term gains.

Jacob: 08:27

48,200 of that is actually going to be taxed at 0%, which is really interesting. Now the 50 what is that? The 51,800 that's above this $96,700 limit, that $51,800 that's left over here, that's going to be taxed at 15%. Okay? So what you're hopefully getting out of this is you're seeing that because they have $100,000 of capital gains, they're not all at 15%.

Jacob: 08:56

Okay, they're just stacked on top and they, the brackets are blended together. It's a tiered system. So just like our normal income tax rates work, right? The first 23,000 is at 10%. The next 73 ish thousand dollars is at 12%.

Jacob: 09:11

Only the dollars that fall in those ranges are at those rates. So it's this is not a cliff of long term capital gain brackets and rates. It's still blended and it's still tiered just like our normal income. So that's important to pay attention to. But with all this being said, your capital gains get stacked on top of any other income you have, earned income, IRA distributions, four zero one ks distributions, Social Security, they get stacked on top of that, and then they're treated as long term capital gains based on how much taxable income is there.

Jacob: 09:42

So hopefully that example gives you a little bit of clarity there on how this works and why it is important to understand and that your capital gains are not added first, and then your other income on top of that, which would force your normal income into higher brackets. That's not the way it works. The capital gains technically get added on to it last. Now, there's more to it than just saying, does it impact our income directly from a tax standpoint? There are actually other sneaky things here that can get in the way or be impacted by these capital gains.

Jacob: 10:13

So for example, whenever you realize more capital gains, you could be creating a higher tax burden or subjecting more of your Social Security benefits to being taxable. So, you could have minimal taxes on your Social Security or only half of your Social Security being taxable, but if you realize capital gains that would push you into a higher adjusted gross income situation, more of your social security could become taxable. And it doesn't just stop there. When you think about IRMAA, which stands for income related monthly adjustment amount and how this relates to your Medicare premiums, if you create gains by selling something in your brokerage account, you might pay only 15% tax on that, but guess what? You could be sending your premiums higher in two years down the road because of these additional incomes that are being added on to your modified adjusted gross income.

Jacob: 10:59

And then for those of you who are not yet 65, when you're thinking about ACA subsidies, right, and you're trying to qualify for those and keep your premiums as low as possible before you get to Medicare age, you might can do some tax gain harvesting at 0% and fill up the $96,000 of room that you have. But the key is, is that would push you above the subsidy limits because the gains, even though they are taxed at 0%, they are included in your modified adjusted gross income, which is then used to determine whether or not you qualify for certain subsidies. So just because you are maybe lowering your taxes by realizing gains and by how much you're realizing, you've got to pay attention to these other things that could be indirectly affected by creating a higher adjusted gross income. So planning strategies for you as someone who's retired or close to it. Think about tax gain harvesting, it's a huge win for you.

Jacob: 11:48

It's a huge opportunity that most people just don't know about. I encourage you to go listen to that previous episode because I think it could be valuable for you to gain some insight from. Capital So gains harvesting, intentionally doing that at the 0% rate could be huge, especially during those lower income years, but you do have to watch out for ACA subsidies or IRMA surcharges or potentially pushing Social Security into higher tax brackets. If you try to do one strategy you know, to increase your savings and not pay as much in tax, it could get you somewhere else if you're not paying attention. And that's why I always emphasize having a comprehensive plan where you understand the benefits and the drawbacks and the pros and cons, and how all these different strategies really work together.

Jacob: 12:27

Because if you do one thing in a silo, it could create multiple problems elsewhere without you knowing it indirectly. So that's why I'm a big fan of comprehensive planning. That's what we do with our clients. If you're someone who's like, hey, I get some of this stuff, it's a little bit beyond me or I just want to figure it out myself. Great, you can book a call with me.

Jacob: 12:43

It's completely free. We'll have a conversation, see what your situation looks like and see if there's anything that I might be able to do to help. So thank you for tuning into this week's episode. I hope it's been helpful as you understand how capital gains relate and interact with other income. Other than that, I hope you have a great rest of your week and we'll talk to you very soon.

Jacob: 13:09

Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.