Confirming long term gain tax rate calculation for 2020

[traderjosefina]

Hello,

I wanted to see if I'm doing this correctly with some hypothetical numbers for my 2020 taxes:

Say I have $45K gross income from rental property and employment income.

After subtracting

    1) $3K expenses from my rental and

    2) $7K from an IRA contribution, as I'm over 50.

I have $35,000 income.

In this case, I will have 0% capital gains taxed owed on a long-term stock sale I made...right (since I'm under the $39,375 limit)?

Thank you!

[tagteam]

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@traderjosefina wrote:

In this case, I will have 0% capital gains taxed owed on a long-term stock sale I made...right (since I'm under the $39,375 limit)?

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Probably, but recall that the amount of the gain factors into the calculation as well. If your gain is $20,000, for example, then you will not be taxed at the 0% rate.

[rjs · Accepted solution]

For someone with single filing status, $39,375 is the top of the 0% rate bracket for 2019. For 2020 it's $40,000.

The tax rate that applies to the long-term capital gain is determined by your total taxable income, including the long-term gain. But it's based on taxable income, not gross income. (Taxable income is basically Adjusted Gross Income minus deductions.) And the gain is not necessarily all taxed at the same rate. If your taxable income crosses a bracket boundary, portions of the gain could be taxed at different rates. Here are two examples of how the tax on a long-term capital gain is calculated, using your "hypothetical numbers" as a starting point, and assuming your filing status is single. All the figures in these examples are for 2020.

You are assuming an Adjusted Gross Income (AGI) of $35,000 before adding the long-term capital gain. Suppose your long-term capital gain is $15,000. That makes your AGI $50,000 ($35,000 plus the $15,000 gain). The standard deduction for single filing status for 2020 is $12,400. Subtracting the $12,400 standard deduction from your $50,000 AGI gives you taxable income of $37,600. That's less than the $40,000 maximum for the 0% bracket, so your entire long-term capital gain of $15,000 would be taxed at 0%.

Now suppose we take the same example, but your long-term capital gain is $25,000. That makes your AGI $60,000. Subtracting the $12,400 standard deduction gives you taxable income of $47,600, which is over the $40,000 top of the 0% bracket. A portion of the gain still fits into the 0% bracket. Your taxable ordinary income is $22,600 ($35,000 minus the $12,400 standard deduction). The top of the 0% bracket, $40,000, minus the $22,600 ordinary income is $17,400. So there is room for $17,400 of capital gain in the 0% bracket. The rest of the long-term capital gain, $25,000 - $17,400 = $7,600 goes into the next higher bracket and will be taxed at the 15% rate.

Also keep in mind that most states do not have lower tax rates for long-term capital gains like the federal tax does. If you are in a state that has income tax, you may have to pay state tax on the entire capital gain.

[traderjosefina]

Thank you...but I must say this is depressing news if it's true (and you do sound very experienced).

All the articles I have read seemed to imply that the % you pay on the long-term gain was based on the bracket you're in - not adding capital gains amounts to your income to determine your tax bracket.

I'm not sure if I can include a link but they were supposedly reputable sources on searches for 2020 capital gains rates.

In fact I heard a report the other day that it's become an issue that retirees and the super rich who don't have much income but have huge gains aren't paying tax on the gains.

This is actually a big deal to confirm as I'm on the cusp of $40K and have a huge long-term capital gain on a stock. (Don't be jealous I have plenty of losses too!) 😉

Thanks for any further thoughts.

[tagteam]

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@traderjosefina wrote:

In fact I heard a report the other day that it's become an issue that retirees and the super rich who don't have much income but have huge gains aren't paying tax on the gains.

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That is just not true. What is true is that tax rate on capital gain is lower than that of ordinary income (e.g., salary, wages, interest, et al).

Nevertheless, taxpayers with "huge gains" are paying tax on those gains.

See https://www.irs.gov/taxtopics/tc409

Also note, since you mentioned "plenty of losses", that capital gains and losses are netted so your losses will offset some or all of your gains.

[TomYoung]

ASSUMING for the moment that your taxable income is below the top dollar amount where LTCGs are taxed at 0%, you will pay 0% on that LTCG as long as the sum of your other taxable income and the LTCG remain below the threshold.  But the moment that sum exceeds the top dollar amount the additional LTCG will be taxed at the next higher LTCG rate of 15%.  So ultimately it's possible to pay 0% on some of the LTCG and pay 15% on the rest of the LTCG.

[partridge]

Can I ask another example? I feel like I am being taxed on a long term capital gain when I should not.

Example:  AGI is $45,430 and I am a single filer.  My long term capital gain is $4,385 for a total of $49,815 less standard deduction of $12,400 equals $37,415 which puts me under the $40,000 in taxable income.  Yet in the Premier Edition I am being taxed on 100% of the $4385 in LT Capital Gain.  I looked at the capital gain worksheet in Forms and the gain is classified as "L".  What am I missing?  

[rjs]

@partridge 

Seeing the long-term capital gain listed on various forms or worksheets does not mean you are being taxed on it. It's not as simple as subtracting the gain from your taxable income, or omitting it on a form. The long-term gain is included in your total income and AGI, but that doesn't mean it is being taxed.

The tax calculation is done on the Qualified Dividends and Capital Gain Tax Worksheet (or possibly the Schedule D Tax Worksheet). It's somewhat complicated, but if you carefully follow the calculations on the tax worksheet you will see that you are not being taxed on the long-term capital gain. If there are no complications that you haven't mentioned, you will probably see your long-term capital gain on line 9 of the Qualified Dividends and Capital Gain Tax Worksheet, which says "This amount is taxed at 0%."

By the way, the long-term capital gain is already included in your AGI. You don't add the gain to your AGI.

[partridge]

Aha! Thanks for your coaching and for suggesting I look at the Qualified Dividends and Capital Gains Tax Worksheet where I can see that for line 9 that my LTCG is taxed at 0%.  

Thanks so much for the quick and detailed response.

[april4mar]

Dear Champ,

I read your texts below and am so impressed how knowledgeable you are.  May I impose on you for my situation?   I studied your example to a great extent.  Here is how I applied to my situation.  Please correct me if I am totally off base.   Thank you very much. 

I am over 65.  For 2023, I anticipate long term capital gain of $300,000 as a result of buying a property in cash.  I will have capital loss carry forward to 2023 of $100,000.  Standard deduction for senior is $15,700.  My AGI is $40,000.  The top of the 0% rate for LTCG is $44,625.  Given all these information for year 2023, would I be able to reduce my capital gain to $179,675.   

Here is how I calculate based on what I learned from you.  My taxable income should be $24,300 (i.e. $40K minus deduction of $15,700).  The top of the 0% bracket, $44,625 minus taxable income of $24,300 is $20,325.  So there is a room for $20,325 of capital gain in the 0% bracket.  The rest of LTCG, $300,000 - $100,000 (carry forward loss) - $20,325 =$179,675 goes into the next higher bracket and will be taxed at the 15% rate.   In conclusion, I spare $20,325 for being taxed.  Am I correct?  

I look forward to hearing from you very much.  Thank you.

Maureen

[TomD8]

You may find this online capital gain tax calculator helpful:

https://casaplorer.com/capital-gains-tax-calculator

[rjs]

@april4mar 

You said, "I anticipate long term capital gain of $300,000 as a result of buying a property in cash."

There is no capital gain from buying property (or anything else). You have capital gain when you sell something at a profit.

If you do, in fact, have a long-term capital gain of $300,000, the results of your calculation seem basically correct. But let me correct a couple of errors in terminology. Your AGI is $240,000 and your taxable income is $224,300. AGI and taxable income include the capital gain, even the part of the capital gain that is taxed at 0%. (It's taxed at a 0% rate, but it's still technically taxable.) And you do not reduce your capital gain to $179,675. Your net capital gain (after subtracting the loss carryover) is $200,000. The 0% rate does not reduce your capital gain, it just reduces the tax on the gain. But this is all just terminology. As I said, the bottom-line result of your calculation seems to be correct.

[april4mar]

Dear TomD8, I appreciated your answer and a quick reply.

[april4mar]

Dear rjs,

Thank you very much for clarification.  It has been a great educational for me.  I was thrilled to learn something new and valuable.   

With your clarification, I realize I have a huge monthly medicare premium to pay for 2025.

And allow me to clarify what I was saying.  I need to liquidate my investment account so I can cash buy a property.  By doing so, I incur $300,000 long term capital gain.  I was looking for any tax saving.  You gave me the answer.  Thank you.

[april4mar]

Oh, since my AGI $240,000 and taxable income is $224,300, is there still a room for $20,325 of capital gain in the 0% bracket for me?  Am I eligible I wonder?   Thanks.