Yes, when determining the long-term capital gains (LTCG) tax rate, the long-term capital gain is included in your total income to determine your taxable income and which tax bracket applies.
Here’s how it works:
1. Total Income Calculation:
• Add all your income sources, including wages, interest, dividends, and long-term capital gains.
• Long-term capital gains are taxed at preferential rates (0%, 15%, or 20%), depending on your total taxable income.
2. Determine LTCG Tax Rate:
• The long-term capital gain tax rate is determined by where your total taxable income (including the LTCG) falls within the capital gains tax brackets.
• For example:
• If your taxable income (including LTCG) is within the 0% capital gains tax bracket, you pay no tax on the LTCG.
• If it pushes you into the 15% or 20% capital gains tax bracket, the portion of the LTCG in that range is taxed at the corresponding rate.
3. Taxable Income Thresholds (2023):
• The thresholds for the LTCG tax rates are as follows:
• 0% rate: Up to $44,625 for single filers; up to $89,250 for married filing jointly.
• 15% rate: $44,626–$492,300 for single filers; $89,251–$553,850 for married filing jointly.
• 20% rate: Over $492,300 for single filers; over $553,850 for married filing jointly.
Key Point:
While the long-term capital gain is included in your total income for tax purposes, it is subject to the preferential tax rates based on the thresholds specific to capital gains, not ordinary income tax rates.
