Can capital gains end up causing a taxpayer to end up in a higher tax bracket?

Answer 1

There are cases where a person is going to pay more tax when his income includes capital gains, versus the same person with the same income which does not include capital gains. Here are some examples, there are others.

1. A person with low enough income to qualify for the Earned Income Credit. If there are no capital gains, then he gets the EIC. If there are capital gains in excess of $2,800 (for 2006, slightly different for 2007), he loses the EIC and pays more tax than the person without capital gains.

2. A person whose capital gains are taxed at 28% because they are gains on the sale of collectibles. If this person would otherwise be in a tax bracket lower than 28%, his capital gains has put him in a higher tax bracket.

3. Anyone whose capital gains are short-term. The added income is taxed at ordinary rates, and so will raise his tax bracket.

A person would have lower overall tax when he has capital gains in the case of long-term gains when he is in the 25% tax bracket or higher. In this case his gains are taxed at a maximum of 15%.

Answer 2

Capital gains can be taxed at altenative rates depending on their nature. So yes, technically they can push you into a higher bracket, but they are taxed separately from your regular taxable income. Even 28% collectables have an alternative rate and could be taxed at 15% for example. If you do some research on LTCG alternative tax rates, you can probably find an example which will better illustrate this.

Answer 3

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Answer 4

Certainly.

Answer 5

When youn are dealing with money and numbers anything can happen.