The program tells me based on the information I provided my capital gains are taxed at zero percent. Yet they get added by the program to my final income. Why?

[foros105]

After taking the standard deduction the taxable income includes the supposedly tax free capital gains.

[SteamTrain]

Yes, they are included in your AGI, but then the actual tax calculated uses special tax calculation forms that break out the Capital Gains and Qualified Dividends to be treated separately from the rest of your income. 

That this is being done is not obvious on the face of the form 1040.

There are several different tax calculations forms that might be used....but Most likely, it was the Qualified Dividends and Capital Gains Tax Worksheet.

IF you check your line 15 taxable income, vs the IRS tax tables, you should see that the tax in line 16 is lower than what is on the tax tables...that is because the sub-portion of line 15 that came from your Cap Gains and Qual dividends were taxed at lower rates (starting at zero).

[ErnieS0]

@StreamTrain is correct. Net capital gains are added to other income even though they are taxed at a different rate because your total income (regular + capital gains) may limit some deductions or credits.

The actual capital gains tax computation takes place elsewhere on the Tax Smart Worksheet. You will see checked either Schedule D Tax Worksheet or Qualified Dividends and Capital Gains Tax Worksheet.

To see this worksheet:

• Click Tax Tools in the left column
• Click Tools below that
• In the center column, select View Tax Summary
• In the left column click Preview my 1040
• You will see Federal 1040
• Scroll down until you see Tax Smart Worksheet
• When you are done, click Back in the left column

[foros105]

Thank you to all who answered. I appreciate it.