How exactly does long term cap gains tax work when diluted with regular income in the same year?

[Boyan]

Hi everyone,

My scenario's objective is simple: pay zero income tax.

The mechanics: we know that taxable income in tax year 2025 below (Single Filers: Taxable income up to $48,350) will pay $0 in long term cap gains tax. However if one has $30k of deductions (mortgage interest plus property taxes) I postulate that such use case will permit to take an additional $30k distribution out of a 401k since it will be negated by the deductions so taxable income is still kept at bay for the $0 tax LT cap gains goal.

However how would that work out in terms of income tax on the $30k? Which bucket of income (1) or (2) will the deductions apply to? The taxable income will still be less than $48,350/year but it's made up by two different income sources. Please enlighten me! 

[Opus 17 · Accepted solution]

Capital gains stacks on top of your regular taxable income.

Suppose your taxable regular income (after all deductions) is $30,000.  Then, the first $18,350 of capital gains will be taxed at zero percent, because your total taxable income is under $48,350.  Every dollar of capital gains above that will be taxed at 15%, because your total income puts you in the bracket where regular income would be taxed at 22% and LTCG are taxed at 15%. 

[VolvoGirl]

How much are your capital gains?   They are included in the taxable amount  that determines how much capital gains tax you pay.

[Boyan]

Thank you so much for your reply. Just for my personal peace of mind, so if one's taxable income (after all deductions are taken out) is exactly $48,350 or above, then not a single penny of LTCG will be taxed at the 0% rate?

[Opus 17]

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@Boyan wrote:

Thank you so much for your reply. Just for my personal peace of mind, so if one's taxable income (after all deductions are taken out) is exactly $48,350 or above, then not a single penny of LTCG will be taxed at the 0% rate?

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If total taxable income including the LTCG is equal to or less than $48,350, then the portion of the income that is LTCG is not taxed (the tax rate is zero, for single filing status).  The other "regular" income will be taxed at the ordinary rate which is 10-12% at that level.