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I'm afraid I'm missing something because the 0% tax bracket for capital gains seems too good to be true.

Everything I'm reading (e.g. "The zero percent tax rate on capital gains applies to people in the 15 percent marginal tax rate or below. In 2018, that applies to married tax filers with taxable income up to $78,750, and single tax filers with taxable income up to $39,375." at thebalance.com) says that my capital gains tax rate is dependent only my income tax bracket.

In other words, say I have $2 Million worth of a mutual fund, which I bought more than a year ago for $1 Million (i.e. long-term capital gains of $1 Million). If my income this year is $40,000 and I sell all holdings in this fund, I will pay $150k of capital gains tax. However, if my income is $38,000 and I sell it all, I pay nothing.

Is this correct? If not, what am I missing?

Jer
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1 Answers1

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No this is not how it works. Let's say you have long term capital gain of $1M and a regular income of $38k. So your total income is $1038k

  1. You pay regular income tax on the first $38,000,
  2. You pay nothing on the amount between $38,000 to $39376
  3. You pay 15% on the amount between $39376 and $434,550
  4. You pay 20% on the amount between $434,550 and $1,038,000

Total long term tax would be $173,126

Hilmar
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