Long Term Capital Gains Tax Question

[DawgMan]

I'm about to switch gears and start drawing down from my taxable accounts and am trying to do some basic tax planning. Having run a business for my career with many outside investments, I had always leaned on my accountant to do my returns so have not dived into the weeds. Now, I am trying to run some very simple analysis, but feeling like I am missing something when I compare my simple by hand math with an online calculator. Perhaps some of you can help me see the light using the simple examples below.

Constants: Married Filing Jointly/Standard Deduction $24,800/Up to $80K 0% Tax, over $80K 15% Tax

Scenario 1: $200K Long term Capital Gain is only income
Calculator spits out Fed tax of $22,109 and I cannot figure out the math...
- $200,000 x 15% = $30,000?
- $200,000 - $24,800 = $175,200 x 15% = $26,280?
- $200,000 - $80,000 = $120,000 x 15% = $18,000?
Dots are not connecting??

Scenario 2: $200K Long Term Capital Gain + $25K Earned Income
Calculator spits out Fed tax of $26,809.
How do I reconcile this with simple math?

 

[Sunset]

Long Term Capital Gain is taxed at 0% for the first $78,750 in income, so if all that is LTCG, then it's $0

 

[DawgMan]

Long Term Capital Gain is taxed at 0% for the first $78,750 in income, so if all that is LTCG, then it's $0

For 2020, I read $80K and below is $0. Per my examples above, I am still not seeing how the math computes? How does the standard deduction come into play.

 

[Vincenzo Corleone]

Long Term Capital Gain is taxed at 0% for the first $78,750 in income, so if all that is LTCG, then it's $0

I think for married filing jointly for 2020, the first $80,000 of long-term capital gains is taxed at 0%.

https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates

 

[jj]

Use this calculator

https://www.mortgagecalculator.org/calcs/1040-calculator.php

Inputting $200,000 LT capital gain as the only income, and taking the Standard deduction of $24,800 for MFJ, the federal tax owed comes out at $14,480 (should be $14,280).

Edit: I left an ACA premium credit in there by mistake

 

[DawgMan]

Use this calculator

https://www.mortgagecalculator.org/calcs/1040-calculator.php

Inputting $200,000 LT capital gain as the only income, and taking the Standard deduction of $24,800 for MFJ, the federal tax owed comes out at $14,480 (should be $14,280).

Edit: I left an ACA premium credit in there by mistake

You are correct, I am a knucklehead... I forgot to change status from Single to Married. I knew I stayed with DW for a reason!

 

[pb4uski]

Yes. $200,000 LTCG - $24,800 standard deduction = $175,200 of taxable income.

First $80,000 * 0%=$0, remaining $95,200 * 15% = $14,280

https://www.dinkytown.net/java/1040-tax-calculator.html

Add $25k of ordinary income then taxable income is $200,200... composed of $200 of ordinary income and $200,000 of preferenced income.... $200 ordinary income results in $20 tax at 10% then first $79,800 of preferenced income is at 0% and remaining $120,200 is at 15% resulting in $18,030 in tax... total tax is $18,050.

 

[DawgMan]

Yes. $200,000 LTCG - $24,800 standard deduction = $175,200 of taxable income.

First $80,000 * 0%=$0, remaining $95,200 * 15% = $14,280

https://www.dinkytown.net/java/1040-tax-calculator.html

Add $25k of ordinary income then taxable income is $200,200... composed of $200 of ordinary income and $200,000 of preferenced income.... $200 ordinary income results in $20 tax at 10% then first $79,800 of preferenced income is at 0% and remaining $120,200 is at 15% resulting in $18,030 in tax... total tax is $18,050.

This helps. So the bottom-line is my standard deduction eats up any earned income (non long term capital gains) first, then it's taxed at it's marginal rate(s), then my capital gain at it's rate?

Thanks.

 

[SecondCor521]

This helps. So the bottom-line is my standard deduction eats up any earned income (non long term capital gains) first, then it's taxed at it's marginal rate(s), then my capital gain at it's rate?

Thanks.

I'm not @pb4uski, but yes, you're correct. You can think of it as investment income stacks on top of ordinary income, and the standard deduction eats up from the bottom. What's left is taxable at the various brackets.

Another thing to note is that, when figuring the capital gains taxes, any ordinary income uses up the capital gains brackets. So if you had, say, ~$80K in ordinary income and $20K in capital gains, the $20K in capital gains would *not* be taxed at 0% (even though it's less than the $80K 0% capital gains bracket) because the $80K in ordinary income used up that bracket. Although, of course, the ordinary income would be taxed at ordinary income tax rates.

 

[pb4uski]

+1 Yes, the ordinary income is offset by standard deduction and then taxed at ordinary rates.... any preferenced income on top of ordinary income is taxed at 0% until the sum of ordinary income and preferenced income is $80,000... then any additional preferenced income is taxed at 15% (unless you income gets really high).

OTOH, if you had no ordinary income then the standard deduction offsets preferenced income.