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Accordingly, the $32,029 of gain at issue is unrecaptured section
1250 gain subject to the capital gains tax rate of 25 percent.
See sec. 1(h)(1)(B).
Capital Gains Included in Adjusted Gross Income
Citing the 1997 Act, petitioners argue that by law the
maximum long-term capital gains tax rate is 20 percent.
Petitioners claim that including capital gains in their adjusted
gross income results in a loss of deductions pursuant to sections
68(a) and 151(d)(3). Petitioners further argue that this loss of
deductions (1) increases the effective tax rate on their capital
gains above 20 percent, and (2) affects the AMT. Petitioners
conclude that since their capital gains tax rate is effectively
increased above 20 percent, respondent has not correctly
determined their tax within the law.
Contrary to petitioners’ interpretation, gain from the sale
of investment property is includable in a taxpayer’s adjusted
gross income (AGI) and subject to the tax imposed under section
1. Pursuant to section 61(a)(3), “gross income” includes gains
derived from dealings in property. The term “adjusted gross
income” means gross income minus various deductions. See sec.
62(a). For a taxpayer who itemizes deductions, “taxable income”
means gross income minus allowed deductions. Sec. 63(a). In
addition, the section 68 limitation on itemized deductions and
the section 151(d)(3) phaseout of the exemption amount are
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