Long Term Capital Gain Tax Calculation

[knownoise]

I have some questions regarding how long term capital gain (LTCG) tax is calculated.

Using 2024 numbers, $0 to $94,050 LTCG tax rate is %, married filing jointly standard deduction is $29,200.

If my income is $123, 250 with all of it being LTCG, my tax will be $0 because my taxable income is $123,250 - $29,200 = $94,050, which falls in the 0% bracket.

Now if I make $1 more in LTGC, my taxable income will be $94,051, which falls in the 15% bracket. What I want to know is: does this make the whole $94,051 taxed at 15% or only the $1 (the portion that's above the $94,050 threshold) taxed at 15% and the $94,050 still at 0%?

I will be surprised if it is former case but there are some online calculators that.

Thank you.

[Mike9241]

only the $1 gets taxed at 15%

[knownoise]

Does it matter if the $1 is ordinary income? Do I still pay $0 tax on the LTCG?

[Hal_Al]

If the $1 is ordinary income, it goes to the "front of the line", pushing $1 of the LTCG to the 15% tax rate.  That is, the $1 is taxed at 15% (LTCG rate) not 22% (the ordinary income rate).  Another way to look at it is: your standard deduction first offsets ordinary income before it offsets LTCG. After that ordinary income is taxed before LTCG.

[knownoise]

If I visualize the process, does it work like this. I have a container of water representing ordinary income and a container of oil representing LTCG. There are 2 sets of smaller buckets. The 1st set contains 7 buckets each representing 1 ordinary tax bracket (10%, 12%, 22%, etc) with the size of the bucket being the amount between the thresholds. Similarly the 2nd set contains 3 buckets (0%, 15%, 20%) for LTCG. I can know how my income is exactly districted in these different buckets by filling up the buckets. First I remove the amount of water equal to standard deduction from my ordinary income container. If there are not more water left in the ordinary income container, I remove the remaining standard deduction amount from the LTCG container. If there is no water or oil left, I don't own any tax. If there is only oil left, I only own LTCG tax. If there is water left, I try to fill the ordinary income buckets one by one from low bracket to high. At the same time fill the matching LTCG buckets with water from somewhere else because the ordinary income will use up the matching LTCG buckets. Then I fill the remaining LTCG buckets with oil from the LTCG container starting with one partially filled with water. In the end, all buckets will be full except the last one water bucket and last one oil bucket. Each bucket tax amount is the volume of water or oil multiplied by the bucket rate but ignore the water in the oil buckets because they are used to subtract un-usable amount. Adding all of the tax amounts gives me my total tax. Does it sound right?

[TomD8]

For an MFJ tax filer in tax year 2024:

Total taxable income including LTCG $94050 or less = LTCG taxed at 0%

Total taxable income including LTCG $94051 - $583,750 = LTCG taxed at 15%

Total taxable income including LTCG over $583,750 = LTCG taxed at 20%