Why, in TurboTax, are my long-term capital gains being reported as normal taxable income?

[JoeGraz]

Tax Question

I am using Turbo Tax (TT) and my income is about $32K. I have some long-term capital gains which I should not pay tax on since I mak?e less than $42K. But TT is taxing me on them anyway. Am I not interrupting the tax laws correctly. TT is saying they are Long Term Capital Gains.

Or is there a box I need to check

[JamesG1]

Does your tax return contain a Qualified Dividends and Capital Gain Tax Worksheet (page 36) or a Schedule D Tax Worksheet (page D-16) to compute your income tax?

Review the worksheet to see how your income tax was computed and how your long-term capital gains were taxed in the calculation.

In the online versions, you may view or print at Tax Tools / Print Center / Print, save or preview this year's return / Include government and TurboTax worksheets after you have paid for the software.

In the Desktop versions, one can look at the tax return by clicking FORMS, or by viewing the PDF through the Print Center.

@JoeGraz 

[Hal_Al]

Q. But TT is taxing me on them anyway. Am I not interrupting the tax laws correctly?
A Your interpretation of the law is correct.  What you're not understanding (apparently) is how the 0% capital gains tax rate is applied. The capital gain is included in your taxable income. But, instead of just looking up the tax, on that taxable income, in the tax table, you have to use a work sheet to calculate the tax.  That work sheet is called the qualified dividends and capital gains work sheet. "Qualified dividends" are also taxed at long term capital gains rates (0%) in your income range. 

[JoeGraz]

 Went thru this with the TT people three times. What they said I need to use the online version. I am using the Tesktop Home and Business version. IT should do the same thing but they seem to think not.

What TT is doing is adding my long term gains back into the total tax and not zeroing it out. I went thru the Qualified Dividends and CG Worksheet. It never zeros out the CG after checking earnings. It just adds into total earns on line 15 of the 1040 never takes out the CG's. It uses it to calculate my tax. I think TT has a error in its calculation logic. 

I also did a second dummy tax where I did not have any CG's and it it showed the correct numbers. Can someone talk to me by phone from TT?

[TomD8]

@JoeGraz --

Remember that the long-term capital gain tax brackets are based on your total taxable income, which includes the capital gain.

[mjbakerky]

I am using the desktop version. TT calculated my long term Capital Gain tax rate at 20%, even though my TOTAL income (including the capital gain) does not go past the threshold to jump it from 15% to 20%. How do I correct Turbo Tax calc on this?

[AbrahamT]

Check out the "Qualified Dividends and Capital Gain Tax Worksheet and or a Sch D Tax Worksheet which will walk you through step by step to determine how this is calculated.  

[gar101]

I agreed with you. I have the same situation.

[gar101]

Where does it correctly calculated the correct long-term capital gain as you mentioned in your answer?

[DaveF1006]

Look at the Schedule D that is generated in your return. You may look at the Schedule D worksheet that gives detail on how the capital gains tax is computed.

[VolvoGirl]

Even though the full amount shows up in the total income on the 1040 line 7, if you have capital gains or qualified dividends the tax is not taken from the tax table but is calculated separately from Schedule D. The tax will be calculated on the Qualified Dividends and Capital Gain Tax Worksheet. It does not get filed with your return. In the online version you need to save your return as a pdf file and include all the worksheets to see it.

For the Desktop version you can switch to Forms Mode and open the worksheet to see it. Click Forms in the upper right (upper left for Mac) and look through the list and open the Qualified Dividends and Capital Gain Tax Worksheet.

IRS Qualified Dividends and Capital Gain Tax Worksheet—Line 16 on 1040 instructions page 36
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

And when you enter one taxable transaction, you can't just watch the monitor. You increased your overall adjusted gross income and with that come many other changes in your return, not just the incremental tax on the one transaction. More income can make more of any Social Security taxable and can increase or decease any credits you qualified for.

[t-osullivan1]

Do you eventually figure out why the capital gain total value was included in line 7 as income? I saw your post when I googled the same question/issue.  It is confusing. I suppose the line 7 value is added to income since the tax brackets for both would not make any difference if it was reported separate. 

I was wondering how, there could be a zero capital gains bracket for incomes under 40 something thousands. A person could pause working for a year and cash in capital gains for, say for instance, ten million dollars at a zero tax rate. So I guess I'm gathering that the capital gain is included in the income and  wont be taxed until . . .  now I confused myself.

[SusanY1]

You are gathering right.  The capital gain is included in determining a number of things, including the bracket in which capital gains are taxed.  

Line 7 (for 2024) is where the total of both long and short-term gains/losses will appear, but it isn't where the tax is calculated.

You can see the math of it all on the dividends and capital gains worksheet when you print "all forms and worksheets" prior to filing the return.