The difference between my personal tax bracket and capital gains taxes?

Question

I'm investing in the stock market and wondered what is the difference between the rate I get taxed for my personal income (from my 9 to 5) and the rate for capital gains?

Also, what event triggers the capital gains tax rate to kick in?
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Answer 1

The answer to what tax rate you pay on your personal income is "it depends." The short answer can be found on the IRS website at this link:

http://www.irs.gov/formspubs/article/0,,id=164272,00.html

These are for 2007. For example, if you are single and make 100,000 per year, then from Schedule X, you will pay:

$15,698.75 plus 28% of the amount over 77,100

This adds up to $15,698.75 + 6,412 for a total of $22,110.75

This means that your 'marginal tax rate' is 28%. 'Marginal tax rate' is a fancy way of saying "If I earned one more dollar, what would my tax rate be." This is useful, because the US currently uses a graduated tax rate scale. The more you make, the higher percentage you pay of the higher amounts.

Capital gains taxes are paid on things that you've bought and later sold for a profit. The maximum tax rate is 15% (unless your marginal ordinary income tax rate is 15%, then your capital gains tax rate is 5%).

There are some exceptions found at this link:

http://www.irs.gov/taxtopics/tc409.html

So, in this example, if you're in the 28% bracket, you only pay 15% on capital gains, which is a 13% discount. The event that triggers the use of the capital gains rate is when you sell something for a profit.

Answer 2

Long term capital gains get special treatment, and are currently taxed at either 5% or 15%, not more, and less than your personal bracket. Short term capital gains are taxed as ordinary income, so get the same rate as your wages. Long term means you held the asset for at least a year and a day. Short term means you owned it a year or less.

Answer 3

I think the cut off is $10. If you make $10 in investment income, you owe taxes. If I remember correctly capital gains taxes are capped at 15% while income taxes can be more than double that.

Answer 4

The capital gains are on a separate form, then the final number, if applicable, is transferred to a box on your main tax form. Here is a link with some explanation: