If my adjusted gross income is below 40,000. Why would my capital gains 1887.00 become part of that amount.? I thought it would exempt from that figure

[BMcCalpin · Accepted solution]

The adjusted gross income includes all the income and adjustment numbers on the top part of your return (like the first page of the 1040).

However, when taxable income is arrived at (line 43 on the 1040), the tax calculation can be done in one of several ways: the tax tables (most common), the tax rate table, and the capital gains and dividends worksheet (sorry, that's not the exact phrase, but I don't have access to my primary PC at the moment.

On this worksheet, the capital gains and qualifying dividends are removed from taxable income, and the tax on the capital gains and qualifying dividends is calculated separately from the rest of your income. Then the sum of these taxes is carried back to Tax on line 12a on Schedule 1 (1040).

If you don't realize that the tax is coming from that worksheet, then it's hard to see that the capital gains and qualifying dividends are not taxed at the same rate as your ordinary income.

[Edited 3/27/2020 1:18 pm CDT - updated for 2019]