If you are single with no dependents, the first 10,150 is exempt from federal income tax. The first 9,075 in taxable income is taxed at 10%, the next 27,825 in taxable income is taxed at 15%, the next 52,450 is taxed at 25%.
Forget for a moment about dividends & capital gains
For example, if your only income is 50k & you have no other deductions, your tax is figured like this -- 50 k - 10,150 = 39,850 - 9075 = 30,775 - 27,825 = 2950
9075 x 10% = 907.50
27825 x 15% = 4173.75
2950 x 25% = 737.50
907.50 + 4173.75 + 737.50 = 5818.50 federal income tax on 50k . You are only taxed 25% on a portion of your income
If your fund manager buys & sell shares inside the fund, there may be dividends & CG's. You will receive a 1099 Div Tax form in Jan showing both regular & qualified dividends & possible CG's. Qualified dividends are taxed at a lower rate. You report this info on your tax return. Dividends, capital gains & your salary are added together to get your total income. Qualified dividends & long term CG's are NOT taxed the same as ordinary income. If you don't sell any shares yourself, you can report CG's on Line 13 of your 1040 otherwise on Schedule D.
Capital gains tax is zero if your final income falls in the 10 or 15% tax bracket. CG's tax would be 15% in all other tax brackets unless you make over 400k
If you sell any shares, you will receive a 1099 B & you may owe CG's tax on long term capital gains depending on your final tax bracket & you would pay ordinary income tax on short term capital gains. If you are in the 25% tax bracket, you would pay 15% CG's tax on Long term capital gains. You only pay tax on the profits. If you find a way to reduce your taxable income to the 15% tax bracket or it falls in the 15% tax bracket when you complete your actual tax return, you would owe zero capital gains tax on long term CG's..
Have you ever looked at a reg 1040 tax return? You should.
http://www.irs.gov/pub/irs-pdf/f1040.pdf
The worksheet for Qualified Dividends and Capital Gain Tax is in the instructions
http://www.irs.gov/pub/irs-pdf/i1040.pdf
I sure hope you get something out of what I just wrote.. BTW 5,819 tax on 50k amounts to LESS than 12% tax.
Good Luck
You asked: I know that when a fund sells their shares the capital gains tax will be paid by shareholders. But do I also have to pay capital gains taxes once again when filing taxes for the 1099-DIV?
No, you only pay once. You're the shareholder, so the capital gain is passed through to you and reported on the 1099-DIV
If you want to get that precise on the return, then break down the fund's return between a) increase in value (not taxed), b) interest, c)
I don't understand your second example at all. What do capital gains have to do with salary?
I know that when a fund sells their shares the capital gains tax will be paid by shareholders. But do I also have to pay capital gains taxes once again when filing taxes for the 1099-DIV?
Also, how should I view capital gains when estimating my annual return?:
1) Deduct the return percentage from the mutual fund's yearly performance return. Ex: if a mutual fund returns 6% and the capital gains rate is 15%, then my actual return will be 5.1%
OR
2) Ignore the above and don't deduct capital gains taxes from the fund's return. Instead, just file for capital gains taxes from your salary. Ex: You're salary is $50,000 and capital gains tax is 15%. You're real salary will be $42,500.
Would be nice if someone could help me out.
