# U.S. capital gains tax rates - what's considered "taxable income"?



## saygn (Dec 21, 2019)

My question pertains to whether foreign wages are treated as taxable income for the purposes of determining my U.S. capital gains tax bracket on investment profits. 

I live in the UK and qualify for the bona fide resident test. The majority of my income comes in the form of GBP wages. With the U.S. stock market up big this year, I've got a decent amount of US investment gains and I want to know whether selling them will incur a 0% cap gains tax because my U.S. income is less than ~$39k, or if they'll be taxed at 15% because my global income puts me in the 2nd tax bracket (39k - 450k). 

Does my UK income factor into determining my cap gains bracket?

Thanks


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## Bevdeforges (Nov 16, 2007)

In theory, I believe your employment income IS considered "taxable" - largely because it's included in gross income. Taking the FEIE to exclude it from taxation is an option, not an exemption from taxation. 

OK, that's the legalistic interpretation. The various instructions and all are pretty vague, especially if you look at the IRS booklet on "taxable income" (publication 525). And in some places, "taxable income" is alternately described as "gross income" (which includes your excludable foreign salary) or "adjusted gross income" (which is after you have deducted the excludable amount). 

You can always try your luck and use the AGI approach and see if they come back to you.


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## 255 (Sep 8, 2018)

saygn -- As Bev said, your GBP earnings are part of your income, but can essentially be zeroed out by use of the Foreign Earned Income Exclusion (FEIE.) The FEIE is taken on IRS Form 2555, which will flow to Schedule 1, Form 1040, which further flows to Form 1040 before your adjusted gross income is calculated. The determination of the level of your capital gain tax rate is determined based on your "Modified Adjusted Gross Income (MAGI.)" The MAGI is used in numerous IRS calculations, mostly concerning investments. Here is an "Investopedia" article that explains MAGI in simpler terms than the IRS docs.: https://www.investopedia.com/terms/m/magi.asp If you have no additions to your AGI, to determine your MAGI -- your AGI and MAGI may be the same!

You didn't say what your investments were, but assuming you're investing in the stock market, these preferred rates only apply to long term holdings (must own longer than one year.) Short term holdings (held less than one year) are taxed at your ordinary income tax rate. There are also higher rates for collectables and some real estate. Cheers, 255


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## saygn (Dec 21, 2019)

Thanks for the responses! I probably won't test my luck, but certainly interesting.


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## Moulard (Feb 3, 2017)

If you want a level of certainty you can always download last years tax forms and do a dry run to see what it will look like. Use your best estimate of your wages and the capital gain and use those numbers.

The other thing to bear in mind is that I assume you will be paying income tax to HMRC on the capital gain. You can always use a passive Form 1116 to gain a Foreign Tax Credit for the UK taxes on the income.


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## JustLurking (Mar 25, 2015)

Moulard said:


> The other thing to bear in mind is that I assume you will be paying income tax to HMRC on the capital gain. You can always use a passive Form 1116 to gain a Foreign Tax Credit for the UK taxes on the income.


True if that's the case, but the chances are that the OP won't have any UK tax liability on this capital gain, at least not if they manage it right. The UK allows £12,000/year of capital gains tax-free, but the US allows none.

This is just one of many ways in which a US citizen living in the UK can find themselves with a US tax liability but with no means to offset it. In general (and except for salary below the FEIE), on any given piece of income, US citizens living abroad get only the lower of the two countries' tax allowances but must pay the higher of the two countries' tax rates.


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## Moulard (Feb 3, 2017)

JustLurking said:


> In general (and except for salary below the FEIE), on any given piece of income, US citizens living abroad get only the lower of the two countries' tax allowances but must pay the higher of the two countries' tax rates.


Indeed.

The primary purpose of tax treaties are not to protect taxpayers from double taxation but to divide the spoils between the two tax agencies involved.


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