Tax Planning
The framework
Start with gross income, subtract above-the-line adjustments (HSA, traditional IRA, student loan interest, self-employed health insurance), yielding AGI. Then subtract the greater of the standard deduction or itemized deductions (mortgage interest, state and local taxes capped at $10,000, charitable gifts, medical above 7.5% of AGI). The result is taxable income.
Capital gains
Short-term gains are ordinary income. Long-term gains and qualified dividends stack on top of ordinary income and are taxed at 0%, 15%, or 20%. The 3.8% net investment income tax applies above $200,000 single / $250,000 MFJ MAGI. Under the wash sale rule, a loss is disallowed if substantially identical securities are bought within 30 days before or after.
Traps
- Gifts carry over the donor's basis; inherited assets generally receive a step-up to fair market value at death.
- The annual exclusion ($19,000 in 2025) is per donor, per donee; excess reduces lifetime exemption but is not taxed until the exemption is exhausted.
- The kiddie tax applies the parents' rate to a child's unearned income above the threshold.
- Withdrawal ordering from retirement accounts and Roth conversions shift the marginal picture.
Worked example. An MFJ couple has $80,000 ordinary taxable income plus $20,000 long-term gain (2024: 0% bracket ends at $94,050). The first $14,050 of gain is taxed at 0% and the remaining $5,950 at 15%, for $892.50 - not zero, and not 15% on the whole gain.