Why are my long-term capital gains being taxed when my total earned income is less than $40,000? Seems like a glitch in Turbotax software!

[SandySocks]

The problem is line 9 is NOT 0.  Its adding the tax on the capital gain even though wages, dividends, interest, etc are under $40,000.  Over ride?  Tempted, but not feeling great about doing that.  I have the downloaded version.

[fanfare]

Line 9 is a calculated line.

if you override it to zero, IRS computers will immediately note a "miscalculation" and restore the original value.

[SandySocks]

Problem still not solved and now wondering how many times TurboTax had people who were on small fixed incomes pay capital gains tax even though their income was under the limit - $44K for singles.  Shame on them because these are the struggling ones.  I've gone over the worksheets and no where do I find a form that says the total income minus the capital gains less then the $44k limit!  No matter where I look it still comes out that the income tax has to be paid on the capital gains even though all other income is under the $44k.  In this particular case it is a substantial amount for the person, not a couple of dollars.  Will not use this software in future years.  

[SandySocks]

PS when I go to file the taxes it still says owing tax amount including the capital gains tax and ignoring that the income was under $44k.  So even though the software will include the info of capital gains on the 1040 it does not follow IRS rule that says if income is under $44k, capital gains are taxed at $0.  

[VolvoGirl]

Have you filled out the worksheet manually to check?  I haven't seen any other posts about problems with this.  

IRS Qualified Dividends and Capital Gain Tax Worksheet—Line 16 on 1040 instructions page 37
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

And you might need IRS Tax Table page 15 to calculate the tax and to compare to Turbo Tax. That isn't shown in Turbo Tax.
https://www.irs.gov/pub/irs-pdf/i1040tt.pdf

[SandySocks]

Yes, decided to try it manually and it makes better sense and did not include the tax on the capital gain.  In comparing the manual to TurboTax  and I found that the worksheet is still calculating tax on the capital gain.  Not sure why.  Did look at the data source and which was a general overview of behind the scenes calculations and not a straight forward sperate worksheet with check boxes and data sources as to why the software did add tax to the capital gain despite the rule of $0 tax liability for income under $44k.  Thank you for your help.

[dmertz]

Income taxed at long-term capital gains rates is not taxed independently of your other income.  The income taxable at LTCG rates sits on top of all of your income that is taxed at ordinary income tax rates.  This means that the LTCG tax bracket that applies to a particular dollar of LTCG will be affected by how much ordinary taxable income your have.  If any of your income taxed at LTCG rates is being taxed at a rate above 0% on your 2023 tax return, it means that you have more than $44,625 of taxable income on Form 1040 line 15.

[RachelW33]

There are a few instances where long-term gains are taxed differently.  Do any of the long-term gains reported on your return include:

1. Gain from selling section 1202 qualified small business stock 
2. Net capital gains from selling collectibles
3. Unrecaptured section 1250 gain from selling section 1250 real property 

For more details, please see IRS Tax Topic 409.

@SandySocks 

[pbnew]

my question in this situation: assuming I'm below the income limit for a given year how much capital gains can i take at 0%?  I can't find any info on irs site regarding a limit.  I find it hard to believe that I could take $100,000 in capital gains  and pay no tax.

[JamesG1]

The Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet were likely used to compute your Federal tax.

Review whichever worksheet was used to compute your Federal tax.  

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.

@pbnew 

[SandySocks]

no  TIA

[SandySocks]

Thanks, I did print out the worksheets and did it manually as I got too frustrated with TurboTax and figured it out that way, which yielded $0 tax liability on capital gains if income is under $44K.  And I did have verification from a tax accountant, who said there is $0 federal tax on investment capital gains (eg stocks) when earned income is under $44K.  No mention of limit on capital gains, but doubt this would be considered in this case.

[Stebo2023]

Thank!  I do see the correct difference being snuck in and applied after checking the tax tables.  I agree with the other user saying it should be more clear on the 1040.  But if taxes were easy everyone would be paying them:)  Thanks again for the post, hopefully more people notice it before ranting about errors in Turbotax when clearly it is the 1040 not having a line for gains qualifying at 0%   Thanks again!  You rule!

[mikekoval1]

TURBO TAX (TT) USERS beware.  I agree 100% with these other users.  Long Term Capital Gain Taxes are not being computed accurately (LTCG)......The LTCG are being added to your income and become "TOTAL INCOME". 

I do not see where the LTCG is taxed according to the IRS......TT just takes the $$$ from Schedule D line 16 and enters that number into the 1040 versus apply the IRS LTCG tax rates below   

Straight from the IRS... web site  

reference is      https://www.irs.gov/taxtopics/tc409

For taxable years beginning in 2024, the tax rate on most net capital gain is no higher than 15% for most individuals.
A capital gains rate of 0% applies if your taxable income is less than or equal to:

• $47,025 for single and married filing separately;
• $94,050 for married filing jointly and qualifying surviving spouse; and
• $63,000 for head of household.

A capital gains rate of 15% applies if your taxable income is:

• more than $47,025 but less than or equal to $518,900 for single;
• more than $47,025 but less than or equal to $291,850 for married filing separately;
• more than $94,050 but less than or equal to $583,750 for married filing jointly and qualifying surviving spouse; and
• more than $63,000 but less than or equal to $551,350 for head of household.

Turbo Tax (TT) needs to fix this ASAP.   LTCG are not being computed accurately..

The TT  

[dmertz]

TurboTax calculates the tax on Long Term Capital Gains correctly.

"The LTCG are being added to your income and become "TOTAL INCOME"

That's exactly what it is supposed to do.  LTCG is part of your total taxable income, just taxed at a different rate.  The tax on your total income is calculated on the Schedule D Tax Worksheet or the Qualified Dividend and Capital Gain Tax Worksheet, taking into account the portion of your total income that is LTCG.