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The Short Answer

Understanding Capital Gains Tax Brackets

For those whose ordinary income falls below the 25% bracket, some or all gains might be tax-free.

Question: My spouse and I own mutual funds that spin off about $10,000 in capital gains each year. Our income puts us in the 15% tax bracket for capital gains by just a few hundred dollars, but do we have to pay 15% tax on the full $10,000?

Answer: Many taxpayers misunderstand how the tiered structure of our income tax system works, and this applies not just to the brackets used to calculate taxes on ordinary income, such as salaries and commissions from working, but also to those used to calculated taxes on investment-related income, such as capital gains and dividends. In particular, some assume that the tax bracket they fall into determines the rate they pay on all of their income, but that's not correct.