Taxes from LTCG and Qualified Dividends

[explanade]

Doing my taxes in TT. My taxable income is much lower than previous year but TT shows zero taxes due.

I figure it's a bug in the software and even posted a question to the TT Help site. No replies yet.

Started searching and see this paragraph in the IRS instructions for 2016 1040:

4. You had taxable income on your 2015 Form 1040, line 43, but no tax on your Form 1040, line 44, because of the 0% tax rate on net capital gain and qualified dividends in certain situations.

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

OK, all my income is from dividends and cap gain distributions from funds. Also a bit of 1099-INT income from my bank accounts. I don't know that they're necessarily long-term CG (versus short-term, though my funds are mostly boring index funds). I'm not even sure all the dividends are qualified dividends either.

But I search more and find this page:

Taxes on Income and Capital Gains for 2017

So by the first table on that page, my taxable income puts me at the top part of the 15% bracket and the "Tax rate on qualified dividends and long term capital gains" show 0%.

Now like I said, I did have some interest income but it comes out to 1.3% of my total income (gross, before deductions, adjustments).

So even if I don't owe taxes on the 98-99% of my income from fund distributions and dividends, wouldn't I owe some taxes on the interest income at least?

Or does dropping into the 15% bracket eliminate all tax liability?

 

[RunningBum]

Deductions and exemptions work for you too. I'm guessing those were enough to cancel out your interest income, and also keep total income under the 15% cap.

 

[meierlde]

Deductions and exemptions work for you too. I'm guessing those were enough to cancel out your interest income, and also keep total income under the 15% cap.

In particular deductions and exemptions remove the non dividend and capital gains income. If you go to the forms mode on turbotax and look at the qualified dividends and capital gains worksheet you see it starts with the taxable income (i.e. total income less exemptions and deductions). On line 8 of the form you will see the limits to the 15% bracket. If non dividend income is less than the line 8 amount no taxes are due.

 

[explanade]

I'll check that out but what I'm saying is that my taxable income, after deductions and adjustments, was at the top of the 15% bracket.

If most of my income was from a W-2, I'd owe taxes on the same taxable income figure.

Dang, maybe this is how hedge fund owners get away with paying no taxes, with carried interest and no earned income of any kind.

 

[LOL!]

So, you are not going to read the instructions from the IRS on Form 1040 and just go along with what some random tax software told you?

Something like 40% of taxpayers actually don't pay any income tax. Welcome to the club.

 

[RobbieB]

Absolutely. That's why I buy software, so I don't have to read the instructions.

Just answer the questions and fill in the blanks.

 

[RunningBum]

I'll check that out but what I'm saying is that my taxable income, after deductions and adjustments, was at the top of the 15% bracket.

If most of my income was from a W-2, I'd owe taxes on the same taxable income figure.

Dang, maybe this is how hedge fund owners get away with paying no taxes, with carried interest and no earned income of any kind.

All LTCGs and qualified dividends that fit under the 15% cap are not taxed.

Disregard those for a minute, and just look at your other income--interest, any STCGs and non-qualified dividends. Is that amount greater than your deductions and exemptions? If not, you have 0 taxable income from that, so 0 tax. Add in 0 tax from the LTCGs and QDivs, and you get 0.

 

[kaneohe]

RunningBum is correct. For a pictorial way of thinking about this:
https://www.bogleheads.org/forum/viewtopic.php?t=86849
see the chart by tfb on 12/11/11

Think of your income as stacked bars w/ the ordinary income on the bottom and the QDIV/LTCG stacked on top. Deductions/exemptions eat at the bottom of the pile leaving preferentially the QDIV/LTCG on top. If your ordinary income is small compared to your deductions/exemptions, there will be little or nothing to tax.

 

[explanade]

Thanks, makes much more sense now.

Actually discovered this when I was trying to get tax credit for foreign taxes paid by funds.

I was doing exact same things as last year and wasn't getting the credit. The reason is, had no taxes to offset the tax credit.

 

[RunningBum]

Thanks, makes much more sense now.

Actually discovered this when I was trying to get tax credit for foreign taxes paid by funds.

I was doing exact same things as last year and wasn't getting the credit. The reason is, had no taxes to offset the tax credit.

I hit that this year too. Note that in most cases you can carry back the credit one year, by filing a 1040X for last year, and carry it forward for 9 (or is it 10?) years. Definitely worth your while to do unless the tax credit is very small.

 

[kaneohe]

..........................

I was doing exact same things as last year and wasn't getting the credit. The reason is, had no taxes to offset the tax credit.

If your predictive skills are good, in the future you could manufacture income late in the year to create some tax liability.....e.g. Roth conversions....that could use up the FTC. You could even retroactively tune it back in case you created too much income.

 

[scrabbler1]

RunningBum is correct. For a pictorial way of thinking about this:
https://www.bogleheads.org/forum/viewtopic.php?t=86849
see the chart by tfb on 12/11/11

Think of your income as stacked bars w/ the ordinary income on the bottom and the QDIV/LTCG stacked on top. Deductions/exemptions eat at the bottom of the pile leaving preferentially the QDIV/LTCG on top. If your ordinary income is small compared to your deductions/exemptions, there will be little or nothing to tax.

This is what has happened to me for most of the years I have been ERed. Because ~80% of my AGI is either QDIV/LTCG or carved out by deductions/exemptions, only 20% of it actually gets taxed. And for me, that amount is just under the top of the 10% bracket. Therefore, my average federal tax rate is about 2% of AGI (20% x 10%). Sometimes, the ACA premium tax subsidy eliminates more of the taxes due. The ACA subsidy is based on income (MAGI) which includes QDIV and LTCG, though.

 

[audreyh1]

I'll check that out but what I'm saying is that my taxable income, after deductions and adjustments, was at the top of the 15% bracket.

If most of my income was from a W-2, I'd owe taxes on the same taxable income figure.

Dang, maybe this is how hedge fund owners get away with paying no taxes, with carried interest and no earned income of any kind.

If your interest income was below $6300 for your standard deduction plus $4050 for your personal exemption, and the rest qualified dividends and long-term capital gains <$37.6K then congrats!, you owe no Federal income taxes!!!

In other words, as a single filer you can have up to $10,350 in ordinary income and owe no taxes as long as your qualified dividends and long term caps gains don't push you into the 25% tax bracket. The 2016 single total income threshold to owe no taxes on cap gains and qualified divs was $48K taking into account deductions and exemptions.

 

[explanade]

I hit that this year too. Note that in most cases you can carry back the credit one year, by filing a 1040X for last year, and carry it forward for 9 (or is it 10?) years. Definitely worth your while to do unless the tax credit is very small.

Yeah I carried over about $500 from 2015 and incurred more foreign taxes and income this year too.

So I imagine Turbo Tax will know to carry over the prior years and apply it if I go over the 15% bracket?

 

[Sunset]

Yeah I carried over about $500 from 2015 and incurred more foreign taxes and income this year too.

So I imagine Turbo Tax will know to carry over the prior years and apply it if I go over the 15% bracket?

As long as you import the previous year when starting the new one. Also helps as you don't have to retype your name, address, etc.

 

[pb4uski]

OPs ordinary taxable income is nil since deductions and exemptions exceed ordinary income so ordinary tax is nil..Remaining income is qualified and subject to 0% rate since total taxable income is under the top of the 15% tax bracket.

Isn't retirement great!!

 

[RunningBum]

Yeah I carried over about $500 from 2015 and incurred more foreign taxes and income this year too.

So I imagine Turbo Tax will know to carry over the prior years and apply it if I go over the 15% bracket?

I am keeping track, just in case, since all these tax programs seem to have some issues with form 1116.