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Here is a question for any tax attorneys out there. Not sure how to find a clear answer to this question but these pages[1][2] seems to suggest that the capital
by njarboe 9y ago
Here is a question for any tax attorneys out there. Not sure how to find a clear answer to this question but these pages[1][2] seems to suggest that the capital gains tax rate is based on your "Taxable Income". This is shown further down the second page to be "really Regularly Taxed Income minus Adjustments, Deductions, and Exemptions". If your "Taxable Income" is less than 37,950 your long range capital gains tax is 0%.
This seems to me to mean that if you are say Larry Page or Sergey Page and set your salary to $1 (like the do), your main motivation for the low salary might not be to signal that, as a large shareholder, you are aligning your interest with shareholders and thus won't take a salary (this is what I thought the $1 salaries in the Valley were all about, but it always seemed a little silly to me). Maybe your main motivation is that you make all of your income in capital gains and if you have less than $37,950 in "Taxable Income", you pay %0 in capital gains. $1 in "Taxable income" with $1 billion in capital gains and pay $0 in tax. You could make a bit more with a salary of $37,949, but that is nothing compared to your capital gains, and then people would be pointed to exactly what was happening.
This would be a much bigger loophole than covered interest being taxed at the long term capital gains rate. Although, now that I think about it, the two loopholes would work together. Own a hedge fund, take $1 in salary, make $1 billion in carried interest, pay $0 in taxes.
I sure don't want to believe this is the way it works. Links to an IRS.gov web page example that shows otherwise would be greatly appreciated.
[1]http://www.moneychimp.com/features/capgain.htm http://www.moneychimp.com/features/capgain.htm
[2]http://www.moneychimp.com/features/tax_brackets.htm http://www.moneychimp.com/features/tax_brackets.htm
- zamfi 9y agoIANATA, but if you look at the qualified dividends and capital gains tax worksheet [0] on personal income tax form 1040 (that’s the main tax form for individuals), you’ll find that your capital gains tax rate is dependent on your income including capital gains. For the purposes of your example, Larry and Sergei would pay no tax on the first 37,949 of capital gain income (thanks to the $1 salary), but regular capital gain rates on the next ~billion. [0]: https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf https://apps.irs.gov/app/vita/content/globalmedia/capital_ga...
- e12e 9y agoSo does that mean that the effective tax-rate on 100k in (only) capital gains is roughly 63% of the nominal capital gains rate? And how would that typically compare to taøotal taxes on, say, 50k income tax and 50k (taxed) capital gains?
- njarboe 9y agoThanks. That makes sense. Didn't think a loophole that big would not be talked about more. On the other hand, it is interesting to know that you can have a capital gains income of ~75k as a married couple and pay no taxes, if you have no other income. Not a bad income for early retirement.
- tanderson92 9y agoHere's an even more ambitious use of loopholes: "How to pay ZERO taxes in retirement with 6-figure expenses" The poster "livesoft" is one of the consistently insightful and funny posters I know. https://www.bogleheads.org/forum/viewtopic.php?t=87471 https://www.bogleheads.org/forum/viewtopic.php?t=87471
- haikuginger 9y agoThe base tax bracket rates you're looking at are based on AGI (adjusted gross income); investment income is _included_ in AGI, so if you have a million dollars in investment income and one dollar in earned income, your gross income is $1,000,001; your tax rates for both investment income and earned income will be set appropriately.