Do long-term capital gains get taxed directly at 15-20% and then the amount of income factor into what tax bracket I'm in?

[signs-and-more-signs]

Here's my issue. I'm making an investment that I will hold into 2019, thereby taking a long-term capital gain. I know I will pay a maximum tax of 20% on that income.

Where I'm hazy is what, if any, further impact does the capital gain have? Is it counted against my total income to push me into a higher bracket?

Example...

Say the long-term capital gain is $100,000.

Then, my wife and I earn $120,000 in salaries and for the sake of simplicity, say that our only deduction is the $24,000 standard deduction. That's a net of $96,000.

1.  So, we pay 15% for LTCG tax = $15,000

2.  Do we then pay 22% on the $96,000 net from our jobs, or is the capital gain somehow factored back in to drive us into the next bracket?

Please don't tell me to load everything into the software. This is speculative and I just need a direction.

Thanks.

[MinhT]

From 2018, long-term capital Gains (LTCG) are taxed at 0%, 15% or 20% depending on your tax brackets.

For the purpose of determining your LTCG tax rate, LTCG are added to your ordinary income.

Your tax bracket for your ordinary income depends only on your ordinary income. Your LTCG will not push you to a higher bracket.

In your example above, if you are married filing jointly, at $96,000 of taxable ordinary income, your tax bracket will be 22%.

If you had $100,000 of LTCG, it will bring your total taxable income to $196,000 to determine your LTCG tax rate which will be 15%. But your ordinary income tax bracket will still be 22%, and not pushed up to 24%.

[signs-and-more-signs]

Thanks. Just a little confused.

So I add the LTCG to ordinary income to determine the LTCG tax rate? Don't get that, I thought these were two separate issues.

I add my $96,000 ordinary income to the LTCG of $100,000, totaling $196,000, as you indicate. This total is then taxed at 15%?

If so, what gets taxed at 22%?

If I'm adding my ordinary income to the LTCG and paying 15% on the new total of $196K, would I still have to pay 22% on the ordinary income?

That looks like double taxation to me.

Please show me a numerical breakdown of what gets taxed and at which rates.

Thanks.

[dmertz]

Your LTCG is treated as the last income received when determining the tax bracket into which any particular income falls.  Generally speaking, when determining your tax, the LTCG is subtracted from your taxable income, ordinary income tax is calculated on the remainder, then added to that is the tax on your LTCG calculated at LTCG rates.  For 2017, the LTCG rate (0%, 15% or 20%) is determined by the tax bracket in which the LTCG would have been taxed if it had instead been ordinary income.  For 2018 and later, the LTCG rates are determined by dollar thresholds (adjusted for inflation) rather than tax brackets where the income would have fallen as ordinary income, decoupling the LTCG brackets from the ordinary income tax brackets, but with similar effect.

In your example, your $96,000 of ordinary income is taxed the same amount as it would be if you had no LTCG.  Add to that 15% tax on the $100,000 of LTGC.  (This assumes that $96,000 is your taxable income without the LTCG.  $96,000 is your AGI, you have sufficient deductions to bring you under the LTCG "maximum zero rate amount" of $77,200 (for 2018, adjusted for inflation in later years) and you are married filing jointly, some of your LTCG will be taxed at 0%.  If are not filing jointly, the maximum zero rate amount is $38,600 and your ordinary taxable income is likely to be above that, pushing all of the LTCG in to the 15% LTCG bracket.)

[signs-and-more-signs]

Thanks much, dmertz, that's what I thought it was after reading about it but just wasn't sure how it would all shake out. Your answer gives that clarity.

[jxchari]

im selling my house it is over a year and less then 2years which is long term capital gain. Total married filing 65000.00. I made profit 100k. Does this need to be added to my income which is 165k? if so looks like tax bracket for income is 12%, however I see our income is under $77,200 which is 0% tax on capital gain. Can anyone explain this please

[dmertz]

Yes, the $100,000 adds to your income.  If your AGI for 2018 without this $100,000 of LTCG is $65,000 and you use the standard deduction of $24,000, your taxable income will be $141,000.  $141,000 - $77,200 = $63,800 will be taxed at 15% LT capital gains rate, $100,000 - $63,800 = $36,200 will be taxed at 0% LT capital gains rate and $141,000 - $100,000 = $41,000 will be taxed as ordinary income.  TurboTax will do all of these calculations for you on either the Qualified Dividends and Capital Gain Tax Worksheet or on the Schedule D Tax Worksheet.

[jxchari]

Ok- so either way if i see my house now or wait til 2 yrs before i sell still come out the same, right?

[jxchari]

Wait- does that count my hubby disability income? Which includes our total income

[dmertz]

If you wait until you've lived in the house for 2 years you'll be eligible to exclude the gain on the sale of the home:

<a rel="nofollow" target="_blank" href="https://www.irs.gov/taxtopics/tc701">https://www.irs.gov/taxtopics/tc701</a>

The calculation I did assumes that your AGI is $65,000 before adding the $100,000 capital gain.  Enter everything into TurboTax and it will do the calculations.

[Michael64]

Just found this post and I'm trying to follow the math. Why wouldn't the tax bracket of the couple be 24% instead of 22% (based on 2018/2018 tax tables)?

[Critter]

I suggest you work thru the cap gain worksheet ... it make make the whole process clearer ... https://www.irs.gov/pub/irs-prior/i1040gi--2018.pdf#page=40

[Starskii]

Hi, ok so I ran these equations using the current 2019 brackets numbers, but I ran into an issue at the end. My AIG will only be $7,504 with a LTCG of $136,333, so I get a negative # for regularly taxed income. Is this correct?

[Starskii]

My negative # of regular taxed income in the end of the equations + my AIG ends up equaling the 2019 standard deduction of 24,400. So I’m guessing the math is right, but I just will not be taxed on my regular income because t gets canceled out since my AIG was so much lower than the standard deduction correct?

[gparadis308]

Sorry, still confused over which bracket we fall into. (Married filing jointly)

Income=$29k, + Interest & Dividends = $49k; Short-term gains = $0; Long-term gains = $62k

So, I believe we are in the 22% tax bracket for the Income but for the long-term gains, are we in the 0% or 15% ?