Question on tax-free capital gains

[Curmudgeon]

Trying to do some tax planning for 2017. Had a question about taxation of different classes of income.
Let's say in 2017 (married filing jointly) I have 20K of wage and other normally-taxable income, plus 50K of LTCG & Qualified Dividends. I have 19K of exemptions and itemized deductions. Am I correct to assume:

AGI = 70K
Taxable income = 70K - 19K = 51K (So, 15% tax bracket, and 0% on LTCG & QD)
Tax: I can claim that 50K of the 51K is 0% tax, so my total tax would be 15% of the 1K that is wages?

 

[RunningBum]

You'd actually be in the 10% bracket if your numbers are right. Easiest way to check is to run a dummy return through your tax program or tax caster.

 

[RunningBum]

The LTCG and QDiv worksheet is where you'll see how those are treated separately from regular income.

 

[Curmudgeon]

You'd actually be in the 10% bracket if your numbers are right. Easiest way to check is to run a dummy return through your tax program or tax caster.

THanks. TO clarify, my real question is: Assuming I'm in a 0% LTCG/QD bracket, can I claim ALL of my LTCG/QD FIRST against the taxable income, or do I need to pay the taxes on the entire wage income first, and the remainder is 0% LTCG/QD? I think it's the former, but will check against the worksheet.

 

[RunningBum]

I think the worksheet I mentioned is the place where you'll be able to see that the deductions and exemptions will be taken against your wage and other regular income first. We may not be using quite the same terms, but you definitely do not pay taxes on all the regular income first and then start deducting things.

 

[kaneohe]

Running Bum is correct. On line 7 of the wksht, you have the taxable income less (QDIV/LTCG). On line 24 of the wksht, you calculate the tax on line 7 which is basically the ordinary income less deductions/exemptions.......

A nice pictorial way of thinking about it is to imagine a stacked bar chart of
QDIV/LTCG sitting on top of the ordinary income. The deductions/exemptions are taken out of the bottom of that bar (the ordinary income) so the favorable nature of QDIV/LTCG is preserved.

As RB mentioned, the best way to doublecheck your intuition is tax software or a tax calculator.

 

[mathjak107]

kitces explains it well

https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

 

[LOL!]

Right, no need to guess. Use your tax software.

 

[pb4uski]

You'd actually be in the 10% bracket if your numbers are right. Easiest way to check is to run a dummy return through your tax program or tax caster.

Your $51k of TI is $1k of ordinary income and $50k of tax preferenced income.

Your tax would be $100 (10% of $1k ordinary income) plus 0% * $50k = $100.

I had a very similar situation in 2016... $103k of total income and $75k of taxable income. $70k of the $75k of TI was qualified dividends and LTCG.

My tax was $500 (10% of $5k of ordinary income) + 0% * $70k of preferenced income. I also had a $300 foreign tax credit so my net tax was ~$200.

Do a trial tax return or use Taxcaster and you'll see.

 

[Curmudgeon]

Thanks all.

Actually I had done a 'simulation' using the estimated tax worksheet from HRBlock2016 software, but when it showed $0 in tax (the actual numbers I used had wage income < deductions + exemptions) I wasn't sure whether to believe it. It doesn't show how it came up with that number, and I've seen so many bugs in HRBlock software the last couple years I couldn't trust the number without understanding the calculation behind it.

The good news is that I can realize a lot more cap gains this year without paying tax on it! Bad news is that every dollar of cap gains costs me about 15 cents in lost ACA subsidy... but I guess I can't complain, as at least I'm getting the subsidy...