Range Calc: Special cases

Capital Gains 29.4%

Ordinary Income - Large Negative Cap Gain Spike

Capital Gains - 29.4%?

In this capital gains chart from Range Calc, it appears that adding additional $12,000 of capital gains from baseline results in an almost 29.4% capital gains rate for a brief range before settling into the expected 15% rate. 

At baseline, income is low enough such that less than 85% of Social Security benefits are taxable. With each increment of additional capital gains, taxable Social Security benefits increase, which in turn add to taxable income.

Initially, taxable income is still low enough such that long-term gains and qualified dividends are taxed at 0%. Eventually, however, enough capital gains are added such that the next increment of gains is taxed at 15%. At the same time, however, the increased taxable Social Security benefits push another amount of capital gains from the 0% bracket into the 15% bracket, since capital gains stack in top of ordinary income when determining taxable income.

Put another way, the incremental capital gains add to both the top and the bottom of the taxable income stack. Accordingly, in that narrow band, adding $1,000 of incremental capital gains yields $294 of taxes for a 29.4% effective rate: $150 from the additional capital gains, plus another $144 stemming from the circular effect of pushing existing capital gains from the 0% bracket into the 15%, due to impact of higher taxable Social Security benefits increasing taxable income. 

Ordinary Income - large negative capital gain spike and AMT when not expected

In this Range Calc snapshot, the Y-axis is so large that it renders the chart almost unreadable, save for the significant downward spike reflecting what looks to be a tax decrease due to capital gains, as well as a barely visible light purple section suggesting the presence of AMT. 

Usually, this picture results from a mismatch of capital gains between the regular and AMT inputs for capital gains on Schedule D:

While there are some circumstances where capital gains between the two tax systems are not identical (such as when cost basis under the two systems is not the same, as can happen with the sale of stock obtained via Incentive Stock Option exercises), this is usually accompanied by an entry in Line 2k of Form 6251. 

Periodically, this dissociation between the Regular and AMT Schedule D entries can happen when creating a scenario from an uploaded return. To link the Regular and AMT Schedule D amounts, click the icon in between the two column headers in the Schedule D worksheet. This should result in a more expected Range Calc picture without both the large red spike and the purple AMT section.