(04-27-2024, 10:38 AM)mikesez Wrote:

(04-27-2024, 10:23 AM)InvalidContentWasFoundStarting Wrote: Now I'm already an hour into this thing and I haven't made my point yet.
So for the figures below I am only going to use the 2022 tax rates and Standard Deduction
I am just trying to make a point so I AM NOT ABOUT to do what I did above for 2018 - 2021

Now the above examples were using $1,000,000 and those examples seem to indicate a very favorable Capital Gains tax rate.
But let's illustrate a more realistic example.

Let's say I made 56,316 per year (2022 national average) in wages each year 2018 - 2022 (5 years)
Let's say your only income for the 2018 - 2022 was a (56,616 x 5 =) 281,580 capital gain received in 2022
So we both received the exact same amount during the 5 yr period but you got yours all at one time
All else equal

So my Taxable Income would be 56,316 (Wages) minus 12,950 (2022 Standard Deduction)
= 43,366 Taxable Income for each of the five years

Since wages are Ordinary Income the taxes I would owe would be:
    10% tax (1,027.50) on the chunk of Taxable Income between 0 and 10,275
    12% (3,780) on the chunk of Taxable Income between 10,276 and 41,775
    22% (1,590) on the chunk of Taxable Income between 41,776 and 43,366
Total tax per year = 1,027.50 + 3,780 + 1,590 = 6,397.50
x 5 years = 31,987.50 total taxes owed over the last five years

You would have no Taxable Income for 2018 - 2021
Your Taxable Income for 2022 would be 281,580 - 12,950 (Std Ded) = 268,630
You only get the benefit of one year's worth of Std Ded because all of your income is taxed the year you receive it.

Using the Capital Gains Tax Rate, the taxes you would owe would be:
    0% tax (0) on the chunk of capital gains between 0 and 41,675
    15% (34,043) on the chunk of capital gains between 41,676 and 268,630
For a grand total of 34,043 in taxes owed for the last 5 yrs.
About 2,000 MORE THAN me for the same amount of income.


So Capital Gains tax rate is NOT necessarily more favorable that the Ordinary Income tax rate.

I'm not going to check the math but I agree that it sounds correct.

The typical scheme is two years though, not five.  Pretty sure the discount gets significant in the two year scenario.

In order to qualify for Capital Gains tax treatment, the asset has to be held for at least a year so are you sure that two years is typical?

Either way, let's run the numbers for two years.

I would owe (6,397.50 x 2 =) 12,795 in taxes for 2 yrs of wages (56,616 per year)

And your taxable Capital Gain would be ([56,616 x 2] - 12,950 =) 100,282
Using the Capital Gains Tax Rate, the taxes you would owe would be:
    0% tax (0) on the chunk of capital gains between 0 and 41,675
    15% (8,790.90) on the chunk of capital gains between 41,676 and 100,282
For a grand total of 8,791 in taxes owed for the last 2 yrs
About 4,004 less than me for the same amount of income.

However if your 100,282 Capital Gains income was taxed at the Ordinary Income rate:
    You would pay 10% tax (1,027.50) on the chunk of Taxable Income between 0 and 10,275.
    Then you would pay 12% (3,780) on the chunk of Taxable Income between 10,276 and 41,775.
    Then you would pay 22% (10,406) on the chunk of Taxable Income between 41,776 and 89,075.
    Then you would pay 24% (2,689.44) on the chunk of Taxable Income between 89,076 and 100,282.
For TOTAL TAX of 1,027.50 + 3,780 + 10,406 + 2,689.44 = 17,902.94
About 5,000 more than what I paid for the SAME amount of income.

That's why I agree with the fact that the Capital Gains rate should be more favorable than the Ordinary Income tax rate.

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