Taxable Income Is Stacked, Not Pooled
Ordinary income fills the brackets from the bottom. Every class of capital gain then sits on top of it — so the bracket a gain lands in depends on how much ordinary income is underneath. Each slice pays the lower of two rates: the ordinary rate where it landed, or its own preferential ceiling. Where the ceiling is lower, the staircase drops, and that gap is the entire benefit of a preferential rate.
Model scope
- Tax year
- 2025
- Supported situations
- US federal ordinary income and capital-gain stacking for all four filing statuses, starting from taxable income. Reproduces the source worksheet, including its documented base-tax shortfall of up to $2.09.
- Exclusions
- AGI and deduction calculations, credits, payments, alternative minimum tax, net investment income tax, and state tax.
- Last scope review
- — checked against the model and its documentation; not a tax-law update.
The source rules 26 U.S.C. §1(h) and §1(j), full text — optional
26 U.S.C. §1(h) — Maximum capital gains rate
(h) Maximum capital gains rate
(1) In general If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—
(A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—
(i) taxable income reduced by the net capital gain; or
(ii) the lesser of—
(I) the amount of taxable income taxed at a rate below 25 percent; or
(II) taxable income reduced by the adjusted net capital gain;
(B) 0 percent of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—
(i) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 25 percent, over
(ii) the taxable income reduced by the adjusted net capital gain;
(C) 15 percent of the lesser of—
(i) so much of the adjusted net capital gain (or, if less, taxable income) as exceeds the amount on which a tax is determined under subparagraph (B), or
(ii) the excess of—
(I) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 39.6 percent, over
(II) the sum of the amounts on which a tax is determined under subparagraphs (A) and (B),
(D) 20 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the sum of the amounts on which tax is determined under subparagraphs (B) and (C),
(E) 25 percent of the excess (if any) of—
(i) the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11))), over
(ii) the excess (if any) of—
(I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over
(II) taxable income; and
(F) 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph.
(2) Net capital gain taken into account as investment income For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii).
(3) Adjusted net capital gain For purposes of this subsection, the term “adjusted net capital gain” means the sum of—
(A) net capital gain (determined without regard to paragraph (11)) reduced (but not below zero) by the sum of—
(i) unrecaptured section 1250 gain, and
(ii) 28-percent rate gain, plus
(B) qualified dividend income (as defined in paragraph (11)).
(4) 28-percent rate gain For purposes of this subsection, the term “28-percent rate gain” means the excess (if any) of—
(A) the sum of—
(i) collectibles gain; and
(ii) section 1202 gain, over
(B) the sum of—
(i) collectibles loss;
(ii) the net short-term capital loss; and
(iii) the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year.
(5) Collectibles gain and loss For purposes of this subsection—
(A) In general The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.
(B) Partnerships, etc. For purposes of subparagraph (A), any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.
(6) Unrecaptured section 1250 gain For purposes of this subsection—
(A) In general The term “unrecaptured section 1250 gain” means the excess (if any) of—
(i) the amount of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent, over
(ii) the excess (if any) of—
(I) the amount described in paragraph (4)(B); over
(II) the amount described in paragraph (4)(A).
(B) Limitation with respect to section 1231 property The amount described in subparagraph (A)(i) from sales, exchanges, and conversions described in section 1231(a)(3)(A) for any taxable year shall not exceed the net section 1231 gain (as defined in section 1231(c)(3)) for such year.
(7) Section 1202 gain For purposes of this subsection, the term “section 1202 gain” means the excess of—
(A) the gain which would be excluded from gross income under section 1202 but for the percentage limitation in section 1202(a), over
(B) the gain excluded from gross income under section 1202.
(8) Coordination with recapture of net ordinary losses under section 1231 If any amount is treated as ordinary income under section 1231(c), such amount shall be allocated among the separate categories of net section 1231 gain (as defined in section 1231(c)(3)) in such manner as the Secretary may by forms or regulations prescribe.
(9) Regulations The Secretary may prescribe such regulations as are appropriate (including regulations requiring reporting) to apply this subsection in the case of sales and exchanges by pass-thru entities and of interests in such entities.
(10) Pass-thru entity defined For purposes of this subsection, the term “pass-thru entity” means—
(A) a regulated investment company;
(B) a real estate investment trust;
(C) an S corporation;
(D) a partnership;
(E) an estate or trust;
(F) a common trust fund; and
(G) a qualified electing fund (as defined in section 1295).
(11) Dividends taxed as net capital gain
(A) In general For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income.
(B) Qualified dividend income For purposes of this paragraph—
(i) In general The term “qualified dividend income” means dividends received during the taxable year from—
(I) domestic corporations, and
(II) qualified foreign corporations.
(ii) Certain dividends excluded Such term shall not include—
(I) any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521,
(II) any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and
(III) any dividend described in section 404(k).
(iii) Coordination with section 246(c) Such term shall not include any dividend on any share of stock—
(I) with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c) “60 days” for “45 days” each place it appears and by substituting “121-day period” for “91-day period”), or
(II) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
(C) Qualified foreign corporations
(i) In general Except as otherwise provided in this paragraph, the term “qualified foreign corporation” means any foreign corporation if—
(I) such corporation is incorporated in a possession of the United States, or
(II) such corporation is eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program.
(ii) Dividends on stock readily tradable on United States securities market A foreign corporation not otherwise treated as a qualified foreign corporation under clause (i) shall be so treated with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.
(iii) Exclusion of dividends of certain foreign corporations Such term shall not include—
(I) any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297), and
(II) any corporation which first becomes a surrogate foreign corporation (as defined in section 7874(a)(2)(B)) after the date of the enactment of this subclause, other than a foreign corporation which is treated as a domestic corporation under section 7874(b).
(iv) Coordination with foreign tax credit limitation Rules similar to the rules of section 904(b)(2)(B) shall apply with respect to the dividend rate differential under this paragraph.
(D) Special rules
(i) Amounts taken into account as investment income Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under section 163(d)(4)(B).
(ii) Extraordinary dividends If a taxpayer to whom this section applies receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss.
(iii) Treatment of dividends from regulated investment companies and real estate investment trusts A dividend received from a regulated investment company or a real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857.
26 U.S.C. §1(j) — Modifications for taxable years 2018 through 2025
(j) Modifications for taxable years beginning after 2017
(1) In general In the case of a taxable year beginning after December 31, 2017
(A) subsection (i) shall not apply, and
(B) this section (other than subsection (i)) shall be applied as provided in paragraphs (2) through (6).
(2) Rate tables
(A) Married individuals filing joint returns and surviving spouses The following table shall be applied in lieu of the table contained in subsection (a):
(B) Heads of households The following table shall be applied in lieu of the table contained in subsection (b):
(C) Unmarried individuals other than surviving spouses and heads of households The following table shall be applied in lieu of the table contained in subsection (c):
(D) Married individuals filing separate returns The following table shall be applied in lieu of the table contained in subsection (d):
(E) Estates and trusts The following table shall be applied in lieu of the table contained in subsection (e):
(F) References to rate tables Any reference in this title to a rate of tax under subsection (c) shall be treated as a reference to the corresponding rate bracket under subparagraph (C) of this paragraph, except that the reference in section 3402(q)(1) to the third lowest rate of tax applicable under subsection (c) shall be treated as a reference to the fourth lowest rate of tax under subparagraph (C).
(3) Adjustments
(A) No adjustment in 2018 The tables contained in paragraph (2) shall apply without adjustment for taxable years beginning after December 31, 2017
(B) Subsequent years For taxable years beginning after December 31, 2018
(i) solely for purposes of determining the dollar amounts at which any rate bracket higher than 12 percent ends and at which any rate bracket higher than 22 percent begins, subsection (f)(3) shall be applied by substituting “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof,
(ii) subsection (f)(7)(B) shall apply to any unmarried individual other than a surviving spouse or head of household, and
(iii) subsection (f)(8) shall not apply.
[(4) Repealed. Pub. L. 116–94, div. O, title V, § 501(a), Dec. 20, 2019
(5) Application of current income tax brackets to capital gains brackets
(A) In general Section 1(h)(1) shall be applied—
(i) by substituting “below the maximum zero rate amount” for “which would (without regard to this paragraph) be taxed at a rate below 25 percent” in subparagraph (B)(i), and
(ii) by substituting “below the maximum 15-percent rate amount” for “which would (without regard to this paragraph) be taxed at a rate below 39.6 percent” in subparagraph (C)(ii)(I).
(B) Maximum amounts defined For purposes of applying section 1(h) with the modifications described in subparagraph (A)—
(i) Maximum zero rate amount The maximum zero rate amount shall be—
(I) in the case of a joint return or surviving spouse, $77,200,
(II) in the case of an individual who is a head of household (as defined in section 2(b)), $51,700,
(III) in the case of any other individual (other than an estate or trust), an amount equal to ½ of the amount in effect for the taxable year under subclause (I), and
(IV) in the case of an estate or trust, $2,600.
(ii) Maximum 15-percent rate amount The maximum 15-percent rate amount shall be—
(I) in the case of a joint return or surviving spouse, $479,000 (½ such amount in the case of a married individual filing a separate return),
(II) in the case of an individual who is the head of a household (as defined in section 2(b)), $452,400,
(III) in the case of any other individual (other than an estate or trust), $425,800, and
(IV) in the case of an estate or trust, $12,700.
(C) Inflation adjustment In the case of any taxable year beginning after 2018, each of the dollar amounts in clauses (i) and (ii) of subparagraph (B) shall be increased by an amount equal to—
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment determined under subsection (f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof.
(6) Section 15 not to apply Section 15 shall not apply to any change in a rate of tax by reason of this subsection.
The dollar amounts are not in the statute. §1(j)(5)(C) and §1(j)(3) direct the figures to be adjusted for inflation each year, so the 2025 brackets this tool uses come from Rev. Proc. 2024-40, §2.01 (the rate tables) and §2.03 (the maximum zero rate and maximum 15-percent rate amounts). This panel is a static copy with a retrieval date and the Code is amended; verify both against the primary source before relying on this.
What each dollar of taxable income pays
Total taxable income, by class
The worksheet, line by line
The same columns as the workbook tab. (a) is the ordinary rate where the slice landed, (b) its own preferential rate, and (c) the lower of the two. A is what the slice costs at ordinary rates and B at preferential rates; the final column takes whichever the schedule picks.
| Slice | Amount | Accumulatedtaxable income | Ordinary(a) | Cap. gain(b) | Lower(c) | Ordinary tax(A) | Cap. gain tax(B) | Final taxmin of A, B |
|---|
Ported from the Comprehensive Tax Calculation tab of the ACCTG 410 Individual Taxation Toolbox, formula for formula, including the way that tab accumulates its base-tax column. That accumulation runs each bracket from the previous bracket’s ceiling plus one dollar but adds only (ceiling − floor) of width, so a dollar of width is dropped at every crossing and the running total falls a little further behind the published tables each time: nothing at all inside the first bracket, then 12¢, 24¢, 46¢, 70¢, $1.02, $1.37, $1.72, and $2.09 once the top rate is reached. The tax here is therefore never more than the Rev. Proc. 2024-40 tables and never more than $2.09 less. Every bracket and both capital-gain ceilings match that revenue procedure exactly. The tool shows one year, 2025, and no alternative minimum tax, net investment income tax, or credits.