How are long term capital gains tax rates computed?

Qualified dividends tax rates and net long term capital gains tax rates are (with certain exceptions) 15% maximum.

If taxable income includes a net capital gains and/or qualified dividends, subtract the capital gains and/or dividends from total taxable income. Then determine the capital gains tax on the remaining taxable income using the capital gains tax rates tables.

Capital gains tax rates for tax bracket of 25% or higher

If taxable income, after subtracting the net long-term capital gains and qualified dividends, is in a tax bracket of 25% or higher:

net long term capital gains tax rates are 15%

Capital gains tax rates for tax bracket of 15% or lower

If taxable income, after subtracting the net long-term capital gains and/or qualified dividends, is in the 15% bracket or lower:

net long-term capital gains tax rates are 5% up to the limit of the 15% bracket. Any balance of long term capital gains above the 15% bracket is taxed at the capital gains tax rate of 15%.

Example of capital gains tax rates calculation:

Assume a single individual has taxable income of $70,000, consisting of $20,000 of ordinary income and long term capital gains of $50,000. The threshold between the 15% and 27% tax brackets for single individuals in 2005 is $29,700. The $20,000 of ordinary income is taxed at the capital gains tax rate of 15%, the first $9,700 of long-term capital gains is taxed at the capital gains tax rate of 5% and the balance of the capital gains, that is, $40,300, is taxed at the capital gains tax rate of 15%.