re: Tax question on a home sale - ordinary income vs capital gains

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Actually looks like it makes sense now. My error was not knowing that capital gains impact Modified Adjusted Gross Income. That is why I was thinking the entire gain was being treated as ordinary income

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Yeah, it does. Soemtimes I wish the 1040 would show ordinary tax vs capital gains tax right on the face, instead of in the worksheets. So many times clients have asked me... "but how do I know what the tax was on capital gains vs ordinary income", and I have to send them to the worksheets.

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Kind of dumb that capital gains prevent you from deducting from childcare and preschool expenses since it's not like I'll be able to replicate this annually, this was a one time benefit I got super lucky on

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Yes, but the idea is that yuu don't need those benefits THIS YEAR. But you can get the back next year if your income drops back to a level that qualifies.

Now, imagine this. After many years of successful stock picking, you decide you no longer want to manage your investments and you move all your money over to a money manager and give them trade authority. They believe that your portfolio is way out of whack in terms of asset allocation, and so they start selling and buying like crazy. When they are done, they have realized 300K in capital gains.

Issue 1: Client now owes cap gains on 300K although they didn't take any money out of the market.

Issue 2: Clients are Medicare age. A lot of people might not realize this, but Medicare premiums are means tested... the more you earn... the higher the premium you pay. It's a two year trail... your 2022 income impacts your 2024 premiums. It resets every year.

So not only did this couple have to pay tax on $300K in capital gains on their 2022 taxes, they will have to pay several thousand dollars more of additional Medicare premium in 2024. All without withdrawing a single dollar from their investment account.

On Monday, I consulted with a client that had this exact situation.