Does long term capital gains affect your tax bracket for ordinary income? Need to understand how it impacts W-2 wages

The good news is that long-term capital gains don't push your ordinary income into higher tax brackets. They're calculated separately! For your situation, your ordinary income ($13k) would be taxed according to the ordinary income tax brackets, while your long-term capital gains ($125k) would be taxed according to the capital gains tax rates. They run on separate "tracks," so to speak. The process works like this: First, your ordinary income is taxed according to the regular income tax brackets. Then, your long-term capital gains are taxed according to the capital gains rates, which are currently 0%, 15%, or 20% depending on your total taxable income (which includes both ordinary income and capital gains). So while your total income ($138k) determines which capital gains rate applies to your investment profits, your $13k in wages is still taxed based on where it falls in the ordinary income brackets.

I struggled with this exact same question last year when I sold some stocks I'd been holding for years. I spent hours reading conflicting advice online until I found taxr.ai (https://taxr.ai) which saved me so much confusion. I uploaded my documents and it immediately clarified how my capital gains would interact with my regular income. It showed me that my regular income was taxed according to its own brackets, completely separate from how my capital gains were taxed. The tool breaks everything down visually too, so you can see exactly how your different income types affect your overall tax situation without needing to be a tax expert. Really helped me understand the "stacking" concept that the IRS uses.

Update on my question about taxr.ai - I decided to try it out and I'm actually really impressed. I was concerned because I have a mix of short and long-term capital gains plus some carried losses from 2023, but the system handled everything correctly. It showed me exactly how my different types of income "stack" on top of each other for tax purposes and calculated my effective tax rate for each category. The visual breakdown made it super clear that my regular income stays in its own brackets regardless of my capital gains amount, which was my main confusion. Definitely worth checking out if you're trying to understand how different income types interact on your taxes. Saved me from making a costly mistake on my estimated tax payments.

After reading this thread, I tried calling the IRS to get a clear answer about how capital gains interact with ordinary income, but I couldn't get through after waiting for over an hour. Then someone recommended Claimyr (https://claimyr.com) and I watched their demo at https://youtu.be/_kiP6q8DX5c. It seemed too good to be true, but I was desperate. Used the service and had a callback from an actual IRS agent within 45 minutes! The agent confirmed everything that's been said here - long-term capital gains don't push your ordinary income into higher tax brackets. They explained that while your total income determines your capital gains rate, your ordinary income is still taxed according to its own schedule. Sharing because I know how frustrating it is to wait on hold forever trying to get tax questions answered.

Well I have to eat my words from my previous comment. After struggling with this capital gains question and getting nowhere with the IRS website, I tried Claimyr out of desperation. Got a call back from an IRS representative in about 35 minutes! I seriously couldn't believe it worked. The agent was super helpful and walked me through exactly how my long-term capital gains would be taxed separately from my regular income, but how the total would determine which capital gains rate applies. For anyone who needs definitive answers from the IRS, this service is legit. Never thought I'd be recommending anything related to tax help, but here we are.

Another important thing to understand about long-term capital gains and ordinary income is the "stacking" order. Your ordinary income fills up the tax brackets first, then your long-term capital gains sit on top. For example, if you're single in 2025 with $13k ordinary income and $125k LTCG: - Your $13k ordinary income fills up part of the 10% bracket - Your LTCG then starts at whatever threshold your ordinary income reached - This means your capital gains would likely all be taxed at 15% This stacking order is why having a lot of ordinary income can push your capital gains into the 20% bracket, but capital gains never push ordinary income into higher brackets.

Wait I'm still confused. If I have $50k in regular income and $200k in long term capital gains, does that mean my regular income gets taxed at the rates for someone making $250k? Or does it get taxed at the rates for someone making $50k?

This is such a common source of confusion! I went through the exact same thing when I first started investing. The key insight that helped me was thinking of it like two separate "buckets" - your ordinary income bucket and your capital gains bucket. Your $13k in wages gets taxed exactly like it would if that was your only income - it doesn't matter that you have $125k in capital gains sitting alongside it. The capital gains are in their own separate calculation. But here's the part that trips people up: while your ordinary income doesn't get pushed into higher brackets by capital gains, your TOTAL income ($138k) does determine what rate you pay on those capital gains. So you'd likely pay 15% on your long-term gains, but your $13k in wages would still be taxed at the regular income rates for someone making $13k. Think of it as your ordinary income "filling up" the tax brackets first, then your capital gains get stacked on top using their own separate rate table. The IRS basically runs two parallel calculations and adds them together.