I am wondering about the extent to which we need to memorize/know various tax brackets for ordinary income and other forms of income for calculations we may need to do for exam questions. I just finished watching the 2nd of the 2 videos in 3.10, Performance Measures of the Series 65 material.
I knew the tax brackets to use in the sample questions because they were given. Also, once I saw the 37% bracket mentioned, I immediately knew this is the highest bracket. That made it easier because I knew I could assume 20% tax-rate for qualified dividends and 20% (versus 15) for long-term capital gains.
However, had another tax bracket been mentioned – especially one of the middle brackets – I may not have known if I was in 15 or 20% territory (for dividends and LT gains). So, to what extent should we know the break-off points for various tax brackets?
Later added comments from question poster - Just now taking a quiz from the Performance Measures topic. The explanation to the question offered some helpful information. : Achievable…
It seems easy enough to recall that the 34% and 37% brackets tax dividends at 20%. Beyond that, what else should we assume/know about tax rates/brackets?
Hi @Emilio_Rogahn - great question!
The exam will likely cover tax brackets, but you don’t need to know the micro-details. This is all I recommend knowing:
- 37% is the highest marginal tax bracket
- Long-term capital gains tax rates (generalization)
- Those at the two highest brackets (34/37%) = 20%
- Those at any other bracket = 15%
- Tax brackets are progressive
- The higher the bracket, the more likely the investor is wealthy
I doubt the exam will go any further than the points listed above.
Something worthy of pointing out - some investors will pay 0% on long-term capital gains. I did not mention this above, as I do not believe it is covered on the exam. Bottom line - assume long-term capital gains tax rates are either 15% or 20%.
Thanks Brandon. Yes, I was aware that some may pay 0% long-term capital gains. Just looked up the tables for that. I think those brackets were raised. Seems like a married couple could earn about $166K before the standard deduction to get down to the top of the 0% capital gains bracket of about 89K. Yet, I will trust we do not need to know those income limits for the exam.
Will the exam expect us to know who pays 20% for qualified dividends versus 15%?
The furthest the exam goes (based on our analysis) will be something like this:
Joe Smith, who is currently taxed at the 37% income tax bracket… just sold a security at a gain after holding it for 13 months… What is the after-tax yield?
If they mention a person at the 34% or 37% tax bracket, it’s safe to assume they’ll be subject to the 20% long-term capital gains rate. If their tax bracket isn’t mentioned or if it’s not 34% or 37%, then it’s safe to assume they’ll face the 15% rate. We do not currently believe FINRA’s test bank covers the 0% rate, but things can change.
Also, I’m not sure how you’re getting from a married couple earning $166k, using the standard deduction of $27,700 (for married filing jointly in 2023), and getting down to the 0% long-term capital gains tax bracket ending at $89,250. I’m no tax expert (other than the stuff you need to know for the exam), so I might be missing something. Either way, the brackets are not important.
Bottom line - just know those at the two highest tax brackets (34% and 37%) pay 20% on LT cap gains, and just assume everyone else pays 15%.