Tax Bracket
In short
Income level that determines your marginal tax rate
The US has a progressive tax system. You don't pay the top rate on all your income — just on each dollar above specific thresholds. Knowing your bracket helps you understand if gains will be taxed short-term or long-term preferential rates.
Tax brackets determine the marginal rate applied to each portion of income. The US system is progressive: only income above each threshold is taxed at that rate. Relevant for capital gains: the 0% long-term rate applies to taxpayers in the 10-12% ordinary income bracket.
Related concepts
- Short-Term Capital Gains — If you buy a stock and sell it within a year for a profit, the IRS taxes that gain at your regular income tax rate (up to 37%). That's much higher than the 15-20% rate for stocks held longer than a year.
- Long-Term Capital Gains — Hold a stock for more than a year before selling and you get a special lower tax rate — 0%, 15%, or 20% depending on your income. That's much better than paying your regular income tax rate on short-term gains.
- Capital Gains Tax — When you sell an investment for more than you paid, the profit is a capital gain and the government taxes it. Hold less than a year = higher rate (up to 37%). Hold more than a year = lower rate (0%, 15%, or 20%).
- Qualified Dividends — Most dividends from US companies held long enough are 'qualified' and taxed at the low capital gains rate (0-20%) instead of ordinary income rates. Non-qualified dividends (like REITs) are taxed as regular income.