Tax Bracket & Capital Gains Modeler

How Income is Taxed: The "Stack"

The US federal tax system is progressive, but it's often misunderstood how different types of income interact. It's helpful to visualize your income as a stack, following the methodology used by the IRS:

1. Deductions First: Your Adjusted Gross Income (AGI) is reduced by either the Standard Deduction or your Itemized Deductions, resulting in your total Taxable Income.
2. Determine Composition: We determine how much of that Taxable Income is "Ordinary" (wages, interest, short-term gains) and how much is "Preferential" (Long-Term Capital Gains and Qualified Dividends).
3. Ordinary Income Base: The ordinary component forms the base of the stack and is taxed using the standard progressive tax brackets (10%, 12%, 22%, etc.).
4. Preferential Income on Top: The preferential component sits on top of the ordinary income. It is taxed at lower rates (0%, 15%, or 20%).

The Key to Capital Gains Rates

Crucially, the rate applied to your LTCG depends on where the *top* of your total taxable income falls. The ordinary income component "pushes up" the capital gains.

It is a common misconception that deductions apply specifically to ordinary income first. Instead, deductions reduce total AGI. The composition of the resulting Taxable Income is then determined using the IRS Qualified Dividends and Capital Gain Tax Worksheet methodology. For strategies on managing this, see our Roth Conversion Ladder Modeler.

What is Tax Gain Harvesting?

This modeler helps identify opportunities for "Tax Gain Harvesting." This strategy involves intentionally realizing (selling investments for a profit) long-term capital gains in years when your taxable income is low enough to keep those gains within the 0% LTCG bracket.

By doing this, you pay $0 federal tax on the gain and reset the cost basis of your investment higher, reducing the tax burden on future sales. This is a powerful strategy, especially for early retirees or those in a temporary low-income situation.

Limitations

This model provides a visualization of federal income and capital gains tax brackets. It does not account for the Net Investment Income Tax (NIIT), state/local taxes, tax credits (like the Child Tax Credit), Alternative Minimum Tax (AMT), or complex deduction scenarios (like the QBI deduction). It should be used for visualization and planning purposes, not as a substitute for professional tax advice. High income earner? Check the IRMAA Optimizer to see how income affects Medicare premiums.