“I Sold Stock and Did a Roth Conversion — Why Did Part of It Hit the 22% Bracket?”
Capital Gains + Roth Conversion Explained (2025 EA Case Study)
“I barely worked this year, so I thought it was the perfect time to do a Roth IRA conversion. I sold some long-held stock and realized a long-term capital gain, then converted $20,000 from my Traditional IRA.
But when I ran the tax numbers, part of the conversion looked like it was taxed at 22%. I thought I was safely in the 12% bracket — what happened?”
This confusion shows up constantly in real tax consultations. The issue is not a ‘Roth penalty’ or a special tax rate — it’s a misunderstanding of taxable income and how the IRS stacks income.
In this article, we break it down step by step from an EA’s practical perspective.
- 0️⃣ Reframing the Real-World Question
- 1️⃣ Total Income vs. Taxable Income — Where the Confusion Starts
- 2️⃣ What Type of Income Is a Roth Conversion?
- 3️⃣ IRS Ordering Rules: Ordinary Income Comes First
- 4️⃣ Why the 22% Bracket Appears
- 5️⃣ The Bigger Risk: Capital Gains Getting Pushed Up
- 6️⃣ EA Strategy: Partial Roth Conversions
- 7️⃣ Practical Checklist & Common Mistakes
0️⃣ Reframing the Real-World Question
Community questions often mix terminology, which makes the problem harder to diagnose.
Here’s the same situation rewritten in the most common real-life form.
Minimal wages or business income for the year.
Small amounts of interest and dividends.
A sale of long-held stock generating long-term capital gains.
A $20,000 Roth IRA conversion done under the assumption of “low income year.”
The Surprise
Tax software or projections show part of the conversion falling into the 22% bracket. “Why isn’t everything taxed at 12%?”
① If my ordinary income is low, why is my Roth conversion taxed at 22%?
② Aren’t capital gains taxed separately — shouldn’t this be cheaper?
③ Does having capital gains mean I shouldn’t do a Roth conversion at all?
1️⃣ Total Income vs. Taxable Income — Where the Confusion Starts
Many taxpayers think in terms of total income.
Tax brackets, however, operate on taxable income, which is calculated after deductions.
A taxpayer can have $60,000 of total income, but once the standard deduction is applied, their taxable income starts much lower.
Bracket analysis must follow this order:
Total Income → Deductions → Taxable Income
In practice, deductions tend to offset ordinary income first.
That matters greatly when Roth conversions and capital gains exist in the same year.
2️⃣ What Type of Income Is a Roth Conversion?
There is no special treatment here. A Roth IRA conversion is treated as 100% ordinary income.
It is not a capital gain and does not receive preferential rates.
3️⃣ IRS Ordering Rules: Ordinary Income Comes First
The IRS does not tax all income simultaneously. Income is layered in a specific order.
1) Ordinary income (wages, interest, business income, Roth conversion)
2) Deductions applied to reach taxable income
3) Long-term capital gains added on top
Result: Increasing ordinary income affects where capital gains land.
4️⃣ Why the 22% Bracket Appears
Seeing “22%” does not mean the entire conversion was taxed at that rate.
It means the conversion filled the remaining space in the 12% bracket and spilled into the next one.
| Layer | What Sits There | Common Assumption | Reality |
|---|---|---|---|
| Base | Ordinary income + Roth conversion | Conversion is “separate” | Conversion expands ordinary income |
| Middle | Deductions | Brackets use gross income | Brackets use taxable income |
| Top | Capital gains | Always taxed at 15% | Can shift from 0% to 15% |
5️⃣ The Bigger Risk: Capital Gains Getting Pushed Up
The real danger is not just a higher marginal rate on the conversion.
By increasing ordinary income, a Roth conversion can push capital gains out of the 0% range and into the 15% range.
This “balloon effect” means the tax cost of a conversion may be larger than expected — not only on the conversion itself, but also on capital gains that would otherwise be tax-free.
6️⃣ EA Strategy: Partial Roth Conversions
The solution is rarely “don’t convert.” The solution is how much to convert.
1) Project all income for the year
2) Identify key thresholds (22% bracket, 0%→15% CG line)
3) Convert only up to the edge
This is how Roth conversions are safely executed in practice.
7️⃣ Practical Checklist & Common Mistakes
- Analyze taxable income, not gross income
- Include Roth conversions as ordinary income
- Watch capital gain bracket thresholds
- Check ACA subsidy impact
- Review NIIT exposure
- Assuming low income means low bracket
- Believing conversions receive special rates
- Ignoring capital gain interaction
- Converting too much at year-end
- Overlooking state tax consequences
This article is for general U.S. federal tax education only.
Individual outcomes depend on filing status, deductions, other income, ACA credits, NIIT, and state tax law. Roth conversions should always be modeled before execution.