If one has income under $41,675 for 2022, can u pay zero capital gains tax? If income is $46,000, can you reduce the taxable income to $41,000 by contributing to an IRA?

[jposey1]

For long term stock sales capital gains.

[rjs]

Yes, if you make a deductible contribution to a traditional IRA it will reduce your taxable income by the amount of the IRA contribution. You have to be eligible to make a deductible contribution of the amount that you want.

In some cases the limit on the amount that you can deduct could be affected by things that happen during the remainder of the year. Because of that possibility, you should wait until the end of the year to make your IRA contribution. You can make a 2022 IRA contribution up until April 15, 2023.

IMPORTANT: Note that the zero tax rate for long-term capital gains applies if your total taxable income, including the long-term capital gain, is $41,675 or less (for 2022, filing as single or married filing separately).

[dmertz]

Yes, if your taxable income is $46,000 and you have sufficient compensation to make the IRA contribution, a $4,325 deductible traditional IRA contribution will reduce your taxable income to $41,675 where all of your long-term capital gains will be taxed at 0%.

With no IRA deduction, if $46,000 is your gross income rather than your taxable income, your taxable income is already below the $41,675 taxable-income threshold above which LTCGs get taxed at 15%.

[rjs]

To expand a bit on what dmertz said, the tax rate on long-term capital gain is determined by your taxable income, not gross income. Taxable income is your Adjusted Gross Income (AGI) minus your standard deduction or itemized deductions. For 2022, the standard deduction is $12,950 if you file as single, you cannot be claimed as a dependent, and you are under 65 and not blind. So if your gross income, including the long-term capital gain, is $46,000, your taxable income will be $46,000 - $12,950 = $33,050. That is well below the $41,675 limit for the zero percent rate on long-term capital gain, even without any IRA contribution.

[Opus 17]

Yes and yes, but it's more complicated than that, and you can't have unlimited capital gains at zero percent.

Suppose your income is $55,000, your AGI taxable income after your standard deduction is $42,450, just over the o% bracket.  Now suppose you contribute $1000 to a deductible IRA, so your AGI is now $41,450.  You don't make the entire capital gains tax-free, just the first $250, and the rest are taxed at 15% per usual. 

Remember your AGI taxable income is after your deductions, probably the standard deduction in your case.  So if your gross income is $46,000, your AGI taxable income is around $33,500.  Without doing anything else, the first $8000 or so of your gain is tax-free.  If you reduced your AGI taxable income further with a deductible IRA contribution, then more of your gain is tax free by the same amount.  But you never make the entire gain tax free unless your total AGI income including the gain is less than the threshold. 

[dmertz]

Where Opus 17 mentions AGI, he means means taxable income, not AGI.

[Opus 17]

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@dmertz wrote:

Where Opus 17 mentions AGI, he means means taxable income, not AGI.

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Sorry, yes, taxable income after deductions.  

If your total taxable income goes over $41,675, your capital gains over that amount will be taxable, even if your wages and other non-capital gains income are less than that amount.  

Also see here https://www.irs.gov/taxtopics/tc409

[jposey1]

Thank you very much for your detailed replies. This is quite helpful.