Preferential Income Stacking 

One area that can make a meaningful difference is how different types of income are layered within the tax system. Preferential income stacking refers to the way the IRS applies taxes to qualified dividends and long-term capital gains. These types of income are taxed at reduced rates, typically 0%, 15%, or 20%, depending on your overall income level. However, these reduced rates only apply after your ordinary income is taken into account. 

However, when calculating your tax bill, the IRS does not evaluate each type of income in isolation. Instead, it layers them. Your ordinary income (which is taxed at the highest rates) fills up the tax brackets first. Once those dollars are accounted for, your qualified dividends and long-term capital gains (taxed at lower, more preferential rates) are added on top. This is what creates the stacking effect.  

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