28% gain

  • Thread starter Arthur L. Rubin
  • Start date

A

Arthur L. Rubin

I was looking through the 2002 Schedule D instructions, to
get some idea how they might transfer in more complex cases
for 2003, and I ran across an anomaly:

Isn't "28% gain" taxed at 28%, even in the 27% bracket?
Now, the total tax cannot be more than that disregarding the
capital gains rules, but a taxpayer with 28% gains could
lose benefits derived from the (8/10)/20% capital gains
brackets.

Is this consistent with the regulations, or with the law?
Obviously, this only applies to 2001 and later years.
 
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D

Dave Woods, EA

Arthur L. Rubin said:
I was looking through the 2002 Schedule D instructions, to
get some idea how they might transfer in more complex cases
for 2003, and I ran across an anomaly:

Isn't "28% gain" taxed at 28%, even in the 27% bracket?
No.

Now, the total tax cannot be more than that disregarding the
capital gains rules, but a taxpayer with 28% gains could
lose benefits derived from the (8/10)/20% capital gains
brackets.

Is this consistent with the regulations, or with the law?
Obviously, this only applies to 2001 and later years.
ANY rate in the capital gain category cannot be more than
the applicable marginal rate. 28% (and even 25% for gain
recapture) will not apply for those in the 10, 15, or 25%
brackets as they relate to the various other cap gains.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.
 
E

Ed Durall

The 28% rate applies to gain from the sale of collectibles
and certain small business stock. The rate applies to all
taxpayers regardless of their marginal rate.
 
E

Ed Zollars, CPA

Arthur said:
Isn't "28% gain" taxed at 28%, even in the 27% bracket?
Now, the total tax cannot be more than that disregarding the
capital gains rules, but a taxpayer with 28% gains could
lose benefits derived from the (8/10)/20% capital gains
brackets.
Not really--the way the netting works, what will happen is
that the taxpayer will get no benefit from the 28% gain that
survives the netting, but the 5/8/10/20 gains will still
pass through the return and be included in the Schedule D
calculation.

By the way, since there were taxpayers in the 15% bracket in
prior years <grin>, the problem really isn't new.
 
A

Arthur L. Rubin

I was looking through the 2002 Schedule D instructions, to
get some idea how they might transfer in more complex cases
for 2003, and I ran across an anomaly:

Isn't "28% gain" taxed at 28%, even in the 27% bracket?
Now, the total tax cannot be more than that disregarding the
capital gains rules, but a taxpayer with 28% gains could
lose benefits derived from the (8/10)/20% capital gains
brackets.
Talking to myself, as noone else seems to agree with me --
the details, for 2002:

Suppose a taxpayer is in the 27% tax bracket, with or
without capital gains:

If he had $100 in (ordinary) Long Term capital gains, and
$900 in 28% gain, his additional tax would be calculated
using the ordinary tax tables as $270 ($1000 x 27%), as the
Schedule D instructions calculation would otherwise give an
additional tax of $20 ($100 x 20%) + $252 ($900 x 28%) =
$272.

If he had $100 in (ordinary) Long Term capital gains and
$900 in ordinary income, his additional tax would be $243
($900 x 27%) change in the regular tax, and $20 ($100 x 20%)
calculated on Schedule D, for a change of $263; $7 less.

Alternatively, his marginal tax on the $900 of 28% gain is
$250, for a marginal tax rate of approximately 27.78%.

I'm convinced that's correct as following the schedules --
but is it correct as per the regulations, or in law?

The numbers would be different in regard the 25% bracket in
2003, but the idea is still the same.

UPDATE

I confirmed the actual Code at 26 USC 1(h) (dated 1/3/2002).
Seems clear enough unless you can treat the 28% gain as
ordinary income under another provision of the code.
 
H

Herb Smith

I was looking through the 2002 Schedule D instructions, to
Talking to myself, as noone else seems to agree with me --
the details, for 2002:

Suppose a taxpayer is in the 27% tax bracket, with or
without capital gains:

If he had $100 in (ordinary) Long Term capital gains, and
$900 in 28% gain, his additional tax would be calculated
using the ordinary tax tables as $270 ($1000 x 27%), as the
Schedule D instructions calculation would otherwise give an
additional tax of $20 ($100 x 20%) + $252 ($900 x 28%) =
$272.
Flawed logic. The tax would be $20 ($100 x 20%) + $243
($900 x 27%) = $263. The tax is not higher than the
marginal rate of 27%.
If he had $100 in (ordinary) Long Term capital gains and
$900 in ordinary income, his additional tax would be $243
($900 x 27%) change in the regular tax, and $20 ($100 x 20%)
calculated on Schedule D, for a change of $263; $7 less.
It's the same
Alternatively, his marginal tax on the $900 of 28% gain is
$250, for a marginal tax rate of approximately 27.78%.
Marginal rate is 27%, NOT 28%. The term "28% gain" is
merely a label, not a tax rate.
I'm convinced that's correct as following the schedules --
but is it correct as per the regulations, or in law?

The numbers would be different in regard the 25% bracket in
2003, but the idea is still the same.
28% gain would be taxed at 25% instead.
 
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A

Arthur L. Rubin

Flawed logic. The tax would be $20 ($100 x 20%) + $243
($900 x 27%) = $263. The tax is not higher than the
marginal rate of 27%.
Follow the instructions for schedule D, or, if you prefer,
the code at 26 USC 1(h). There's no mention of marginal tax
rates, other than the actual end of the 15% bracket as coded
in schedule D and its instructions, or the reference to "tax
brackets less than 25%" in the Code.

The limitation you specify on 28% gain is not there.
 
D

Dave Woods, EA

Arthur L. Rubin said:
Herb Smith wrote:
Follow the instructions for schedule D, or, if you prefer,
the code at 26 USC 1(h). There's no mention of marginal tax
rates, other than the actual end of the 15% bracket as coded
in schedule D and its instructions, or the reference to "tax
brackets less than 25%" in the Code.

The limitation you specify on 28% gain is not there.
Wanna bet? Sec 1 (h) (1):

     (1) IN GENERAL
 
     If a taxpayer has a net capital gain for any taxable year, the tax
     imposed by this section for such taxable year shall not exceed the
     sum of--
 
          (A) a tax computed at the rates and in the same manner as if
          this subsection had not been enacted on the greater of--
 
               (i) taxable income reduced by the net capital gain, or
 
               (ii) the lesser of--
 
                    (I) the amount of taxable income taxed at a rate below
                    25 percent, or
 
                    (II) taxable income reduced by the adjusted net
                    capital gain,

Focus on the words "lesser of".

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.
 
A

A.G. Kalman

Arthur L. Rubin said:
Herb Smith wrote:
Follow the instructions for schedule D, or, if you prefer,
the code at 26 USC 1(h). There's no mention of marginal tax
rates, other than the actual end of the 15% bracket as coded
in schedule D and its instructions, or the reference to "tax
brackets less than 25%" in the Code.

The limitation you specify on 28% gain is not there.
Arthur's point would be clearer if you realize that Schedule
D is not used to compute the tax when $900 is in column (g).
You have to use the worksheet that is on page D-9 of the
instructions. When you do that, you see that the $900 is
taxed at 28%; $100 is taxed at 20% for a total of $272. As
this is higher than $270 (the 27% rate), one uses $270.
Thus one has no savings at all. All income is taxed at 27%.
Substitute $900 of ordinary income for the $900 of capital
gains and you revert back to Schedule D. The $100 is taxed
at 20% for $20. The taxpayer pays $7 less than ordinary
rates.

The net of all this is that you can never pay more than
ordinary rates but you don't necessarily pay less if you
have an entry in column (g).

I beleive that the worksheet properly implements the tax
code as the code states that "adjusted net capital gain"
used in the formula does not contain the amount subject to
28% tax.

Alan
http://taxtopics.net
 
A

A.G. Kalman

Wanna bet? Sec 1 (h) (1):

     (1) IN GENERAL
 
     If a taxpayer has a net capital gain for any taxable year, the tax
     imposed by this section for such taxable year shall not exceed the
     sum of--
 
          (A) a tax computed at the rates and in the same manner as if
          this subsection had not been enacted on the greater of--
 
               (i) taxable income reduced by the net capital gain, or
 
               (ii) the lesser of--
 
                    (I) the amount of taxable income taxed at a rate below
                    25 percent, or
 
                    (II) taxable income reduced by the adjusted net
                    capital gain,
Focus on the words "lesser of". You need to keep on reading
until you get to Sec. 1(h)(4) where it tells you:

For purposes of this subsection, the term "adjusted net
capital gain" means net capital gain reduced (but not below
zero) by the sum of--

(A) unrecaptured section 1250 gain; and

(B) 28-percent rate gain.

Alan
http://taxtopics.net
 
A

Arthur L. Rubin

Wanna bet? Sec 1 (h) (1):

(1) IN GENERAL

If a taxpayer has a net capital gain for any taxable year, the tax
imposed by this section for such taxable year shall not exceed the
sum of--

(A) a tax computed at the rates and in the same manner as if
this subsection had not been enacted on the greater of--

(i) taxable income reduced by the net capital gain, or

(ii) the lesser of--

(I) the amount of taxable income taxed at a rate below
25 percent, or

(II) taxable income reduced by the adjusted net
capital gain,

Focus on the words "lesser of".
I've already assumed that the taxpayer was in the 27% tax
bracket....

I'm afraid it doesn't work. That essentially prevents "28%
gain" from being considered if you're in the 15% bracket, it
gives no help if you're in the 27% bracket.

It's nice to know that my statements are so controversial.
 
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D

Dave Woods, EA

A.G. Kalman said:
in,

Focus on the words "lesser of". You need to keep on reading
until you get to Sec. 1(h)(4) where it tells you:

For purposes of this subsection, the term "adjusted net
capital gain" means net capital gain reduced (but not below
zero) by the sum of--

(A) unrecaptured section 1250 gain; and

(B) 28-percent rate gain.
Alan, if your marginal rate is less than 28% and you went
all the way to the portion about 28% gain, you went too far.
If you read (A) (i) and (A) (ii) literally, word for word, I
think you will see why. At least that's how I am seeing it.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.
 
A

A.G. Kalman

<snip]
Alan, if your marginal rate is less than 28% and you went
all the way to the portion about 28% gain, you went too far.
If you read (A) (i) and (A) (ii) literally, word for word, I
think you will see why. At least that's how I am seeing it.
We may be talking past each other. If you look at my reply
that contains the information to use the Schedule D
worksheet, you will see that a taxpayer never can pay more
than the ordinary tax rate. In Arthur's example, a $900
capital gain subject to 28% has the effect of wiping out the
long term capital gain subject to 20%. In other words, the
taxpayer winds up paying 27% on all income even though the
t/p had a long term capital gain that should have been taxed
at 20%. The point of all this, is that one can not use
"marginal" tax rates to compute the overall tax. One must
use the absolute rates and then compare the computed tax
using capital gain rates to the computed tax using ordinary
rates.

Once again for clarification:
$900 x 28% = $252
$100 x 20% = $ 20
Total = $272

$1000 x 27% = $270
Therefore, one uses $270 as the tax. The taxpayer never
sees the benefit of the 20% rate. All income items are taxed
at 27%.

If the $900 gain was ordinary income. Then:
$900 x 27% = $243
$100 x 20% = $ 20
Total = $263

$1000 x 27% = $270
Therefore, one use $263 as the tax. The taxpayer sees the
benefit of the 20% rate and saves $7.

Alan
http://taxtopics.net
 
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A

Arthur L. Rubin

Dave Woods said:
Alan, if your marginal rate is less than 28% and you went
all the way to the portion about 28% gain, you went too far.
If you read (A) (i) and (A) (ii) literally, word for word, I
think you will see why. At least that's how I am seeing it.
If taxpayer is in the 27% bracket in 2002 (or 25% in 2003),
with or without the capital gain, then 1(h)(1)(A)(ii) is
irrelevant.
 

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