A dual-income couple walks in: $280,000 wages, $30,000 long-term capital gains, $15,000 qualified dividends. How do the three tax systems (ordinary, LTCG, net investment income tax (NIIT)) stack to produce the final bill? Below you will see that shifting $10,000 from ordinary income into LTCG saves less than the 24-to-15 rate differential alone, because the 3.8% NIIT surtax claws part of the benefit back. The stacking interactions matter.
NOTE: OBBBA changes. Several values in this lesson reflect 2026 (post-OBBBA) law: standard deduction $32,200 MFJ / $16,100 single, SALT cap $40,000, AMT exemption $90,100 single / $140,200 MFJ with flat phase-out at $500,000 / $1,000,000, and the new 0.5% AGI charitable floor. NIIT itself was NOT touched by OBBBA. For a focused walk-through of every OBBBA change, see lesson E36b: OBBBA Tax Law Changes.
The three tax systems stack, they do not replace each other. Ordinary income moves through progressive brackets. LTCG and qualified dividends get preferential rates that depend on where they land in the bracket structure.
Common mistakes
- Forgetting NIIT or applying the wrong threshold. The NIIT threshold is MAGI, not AGI ($200,000 single / $250,000 MFJ). It has not been indexed since 2013. Trap: candidate sees AGI of $245,000 MFJ and assumes NIIT does not apply without checking MAGI add-backs.
- Stacking LTCG incorrectly. LTCG fills brackets AFTER ordinary income, not before. A taxpayer with $20,000 ordinary and $60,000 LTCG (2026 single) pays 0% on the portion of LTCG that fills to the $49,450 breakpoint ($29,450 free), then 15% on the rest ($30,550 × 15% = $4,582.50).
- Thinking kiddie tax uses the child's bracket. The child's rate applies only between $1,350 and $2,700. Unearned income above $2,700 is taxed at parents' marginal rate. Trap: applying the child's 10% to all $8,000 of dividends when only the middle $1,350 slice uses it.
Bottom line
- Federal tax is three stacked systems: ordinary brackets, LTCG/qualified-dividend brackets, and NIIT. Each carries its own thresholds.
- LTCG fills brackets AFTER ordinary income, so the rate depends on total taxable income, not the gain amount.
- NIIT 3.8% hits the LESSER of net investment income or (MAGI minus $200,000 single / $250,000 MFJ). Thresholds unchanged since 2013.
- Kiddie tax: unearned income is tax-free to $1,350, taxed at the child's rate to $2,700, then at the parents' marginal rate. Earned income is exempt.
Exam shortcut
Pattern reads for quick identification: "MAGI above $250,000 MFJ and net investment income greater than zero" → NIIT applies, use lesser-of rule. "Child's unearned income above $2,700" → kiddie tax on the excess at parents' marginal rate. "LTCG rate question with low ordinary income" → check whether any of the gain falls in the 0% LTCG bracket (up to $49,450 single / $98,900 MFJ in 2026). "Standard vs.
The full lesson (about 3,819 words, 25 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- E.37
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