What income is used to determine the Long Term Capital Gains Tax Brackets? Is it Total Income less the Capital Gain? Line 9 on the 1040 (before adding the cap gain)?

[ddricci12]

I understand the Long Term Cap Gains Tax Bracket allows for a Single Filer to have up to $40.4K in income before paying any capital gain tax, but I am confused as to what income is included when determining that Tax Bracket?  Is it lines 1 through 6b plus line 8?  That is, line 9 (Total Income) without the Cap gain amount (line 7)?

[rjs]

The tax bracket for long-term capital gain is determined by your taxable income on Form 1040 line 15 (for 2020). It includes the capital gain as well as your ordinary income.

[Mike9241]

it's complicated 

examples 1) adjusted gross income consists of $52400 in LTCG then the standard deduction of $12400 reduces taxable income to $40K - your tax is $0.

2)$52410 in LTCG your tax is $2 on the $10 excess

3)interest $42,400, LTCG $10,000 then the $12400 standard deduction reduces taxable income to $40K. the $40K is reduced by the $10K in LTCG so you pay tax on $30K. $0 in tax on the LTCG

4) same as 3 but interest is $52,400, taxable income is $50K, the $50K is reduced by the $10K LTCG so you pay regular income taxes on $40K + 15% on the LTCG 

in Turbotax there is a worksheet that computes the tax when you have LTCG and/or qualified dividends

[KochuK]

Hi ddricci12

 Good day!

Please examine the mechanics of "Qualified Dividends and Capital Gain Tax Worksheet - Line 16"

2020 form 1040 instructions Page 36 of https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

To simplify in general terms, the worksheet separates Taxable Income into two groups: 

(1) Qualified dividends and Capital Gains that could subject to special rates;

(2) all other taxable income that is subject to regular tax table.

Then, we look at 2021 Long Term Capital Gain and Qualified Dividends Maximum Tax Rates table:

Single

(2) to fill the bracket $0 and $40,400. If not filled out, the extra is part of (1) to enjoy 0% special tax rate.

Then we go to next bracket $40,401 - $445,800 for 15% special tax rate for the balance of (1).

Then we go to next bracket $445,851 and above for the special tax rate of 20% for the balance of (1) after 15%.

For example, Single filer, total taxable income is $50K with regular component $30K, capital gain $20K:

Capital gain 0% ($40,400 - $30,000 = 10,400 no tax);

Capital gain 15% ($20,000 - $10,400) *15% = $1,440 tax

Plus regular tax on $30K is the total tax liability.

Another example, Single, total taxable income is $80K with regular component $60K, capital gain $20K:

Capital gain 0% ($40,400 - $40,400 = 0);

Capital gain 15% ($20,000 - 0) *15% = $3,000 tax

Plus regular tax on $60K is the total tax liability.

This is a simplified explanation. Please refer to the worksheet for the caps, limitation and calculation. There is also Schedule D tax worksheet for special types of investment sales. TurboTax program takes care of all. Hope this helps.

[ghuete1]

Hi, my long term capital gains are showing as being taxed at 15% even though my taxable income is well below the threshold due to the Foreign Earned Income Tax Exclusion.  Is the LTCG taxable amount including my spouse's foreign earned income which just puts us over the threshold???

[LoganathanB]

Yes for the purpose of long-term capital gains, your Foreign Earned Income Exclusion is also added back to determine the taxable income and the tax bracket. Yes it includes your spouse's Foreign Earned Income.

If you qualify for and claim the foreign earned income exclusion, the foreign housing exclusion, or both, must figure the tax on your remaining non-excluded income using the tax rates that would have applied had you not claimed the exclusion.

Click on the link for more information

Foreign Earned Income Exclusion