I have taxable income on 1040 line 43 and zero tax on line 44. Why?

[ThomasM · Accepted solution]

This could occur if you had long term capital gains or qualified dividends taxed at the zero percent rate.  That would mean you were in either the 10% or 15% tax bracket, since only those brackets have the zero rate.  As soon as you get bumped up to the 25% bracket, the long term cap gains rate climbs to 15%.

Here are the tax brackets, based on filing status (use your line 43 taxable income amount): https://www.irs.com/articles/2016-federal-tax-rates-personal-exemptions-and-standard-deductions 

[geney]

The taxable income was just under $15,000 and was a combination of dividends, interest, pension, social security and long term capital gain.  Does none of that cause taxation?

[ThomasM]

Give me the amounts for line #s 8a & 8b, 9a & 9b, 13, 16a & 16b, 20a & 20b, and 22.

[geney]

4226, 0, 3719, 3450, 19403, 0, 16625, 38150, 22191, 66164 respectively

[ThomasM]

Okay, here’s what I see.  I didn’t ask you about filing status, but with line 43 taxable income of $15k, you’re in the 10% or 15% brackets regardless, which means you’ll pay zero % cap gains rate on your lines 9b & 13 amounts (3450 + 19403 = 22853), assuming all cap gains are long term.  Notice how that amount is larger than your line 43 figure of $15k.

The way IRS sequences deductions, they apply first to ordinary income.  So, based on what you’ve told me, for you to have a $15k taxable income figure, that means you had sufficient exemptions & deductions to whittle your ordinary income down to zero, including any short term cap gains you might have had.  Then those deductions started whittling down the long term cap gains, so the $15k that’s left is entirely made up of LTCG.  This includes an assumption on my part, that no more than 1/4 of your cap gains were short term.

In this scenario, zero tax on $15k of taxable income does make sense.

[geney]

Makes sense.  Thanks.