Quick Answer
Long-term gains (held over 12 months) get preferential rates of 0%, 15%, or 20%; short-term is ordinary income. Net capital losses offset $3,000 of ordinary income a year, carried forward indefinitely. The wash sale rule disallows a loss if a substantially identical security is bought within 30 days either way. Inheritance steps basis up; gifts carry it over.
The whole unit on one sheet: individual income tax, entity taxation, and wealth transfer, condensed to the lines the exam rewards.
Which One-Liners Win Points?
- Marginal rate applies to the last dollar; effective rate is total tax over total income (generally lower). A client "in the 32% bracket" does not pay 32% on all income.
- Alternative Minimum Tax (AMT): taxpayer pays the greater of regular tax or AMT; Incentive Stock Option (ISO) exercise spread is the most-tested preference item.
- C-corporation double taxation is its defining disadvantage; S-corporations and partnerships are passthrough (no entity-level federal income tax).
- A limited liability company (LLC) has no tax form of its own. By default a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership, and it may elect corporate treatment instead.
- REIT vs. MLP taxation: REIT distributions are generally ordinary income (not qualified dividends) and reported on a 1099; an MLP passes through income on a K-1, and distributions generally reduce basis rather than being taxed immediately. The partner is taxed on their share of MLP income even in a year with no distribution at all.
- Passthrough income is taxable to owners whether or not it is distributed (reported on Schedule K-1).
- Trusts hit the top 37% rate at taxable income over $16,000, so trustees distribute income to shift the burden to lower-bracket beneficiaries.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Short-term capital gain rate | Ordinary income rates (up to 37%) |
| Long-term capital gain rates | 0%, 15%, or 20% |
| Long-term holding period | More than 12 months (a year and a day) |
| Capital-loss offset of ordinary income | Up to $3,000 per year ($1,500 if married filing separately); carryforward indefinite |
| Wash sale window | 30 days before + 30 days after (61-day window) |
| Qualified-dividend holding period | More than 60 days in the 121-day window around ex-date |
| Federal income tax bracket range (2026) | 10% to 37% |
| AMT exemption (2026) | $90,100 single / $140,200 married filing jointly |
| AMT rates | 26% on first $244,500 of AMT income (most filers; half that for married filing separately), 28% on excess |
| AMT exemption phaseout | Reduces $0.50 per $1 of AMT income above threshold ($500,000 single / $1,000,000 MFJ) |
| Early-withdrawal penalty (before age 59 1/2) | Generally 10% on top of ordinary income tax (exceptions: death, disability, certain other cases) |
| Required Minimum Distributions (RMDs) begin | Age 73 (75 for those born 1960 or later) |
| Roth qualified distribution | Account open 5+ years AND (owner 59 1/2+, disabled, deceased, or first-time homebuyer up to $10,000) |
| C-corporation tax rate | Flat 21% |
| S-corporation shareholder limit | Up to 100 (generally individuals who are U.S. citizens or residents; certain trusts/estates may also qualify) |
| Trust / estate top rate reached at | Over $16,000 of taxable income (37%) |
| Gift annual exclusion (2026) | $19,000 per recipient (gift splitting = $38,000) |
| Lifetime / estate exemption (2026) | $15 million per individual (unified) |
| Top estate tax rate | 40% |
| Combined married exemption via portability (2026) | Up to $30 million |
Which Gotchas Trip Students Up?
- Portability is not automatic. The surviving spouse must file the estate tax return (Form 706) to claim the deceased spouse's unused exemption, even if no tax is owed.
- Step-up can be a step-down. If an asset declined in value, the heir's basis is the lower fair market value at death and the unrealized loss is permanently lost.
How Is Individual Investment Income Taxed?
- Capital gains basis: Gain or Loss = Sale Price minus Adjusted Basis. Basis adjusts for stock splits, reinvested dividends, return of capital, and improvements.
How Are Entities Taxed?
- Grantor trust: taxed to the grantor. Simple trust: must distribute all income annually. Complex trust: may accumulate income, make charitable gifts, and distribute principal.
How Does the Unified Exemption Work?
- Unified system: lifetime gifts and the estate draw from one exemption pool; the elevated exemption is now permanent, with a no-clawback rule protecting gifts made while it is in effect.
One-Breath Recap
Long-term gains (held over a year) and qualified dividends pay 0%, 15%, or 20%; short-term gains and ordinary dividends pay up to 37%. Net capital losses shave $3,000 of ordinary income a year, carried forward indefinitely; the wash sale rule disallows a loss when a substantially identical security is bought within 30 days either way. Gifts carry over the donor's basis, but inherited capital property generally steps up to fair market value at death, with inherited traditional IRAs taxable. C-corporations face double taxation at a flat 21%, S-corporations and partnerships pass income through whether or not distributed, and trusts and estates hit 37% over $16,000. Wealth transfer runs on a unified $15 million exemption (2026), a $19,000 annual gift exclusion, a 40% top estate rate, and portability to $30 million per couple.
Need more than the recap? Read the full Tax Considerations unit.