Tax Question

[homestead]

Finished our 2021 taxes using H&R Block SW and we are paying zero federal taxes but looking at the 1040SR form it says we have about $300 taxable income.
So that should put us in the 10% bracket (0-20k) so was expecting about $30 tax but no our tax is $0. I fiddled with the income numbers and increased our taxable income to about $1000. Expected that it would show about $100 tax but it only showed $11 tax.
As I increase income to larger amounts it increases the tax amount more approaching a 10% tax rate as I get close to end of the 10% bracket.(20k) So something is limiting the tax on the low end of the bracket. I thought by the time you get the taxable income line in the 1040 form all the credits/deductions have already been taken care of.

Anyone know why this is?

 

[gauss]

Just speculating, but are there any LT Cap gains or Qualified Dividends on the return?
They can often cause unexpected behavior due to the lower tax rates that apply to these types of income.

-gauss

 

[homestead]

Yes, there are some Qualified Dividends in the income.

 

[gauss]

And just to make sure, are you taking into account the Standard Deduction (assuming that you don't itemize deductions) in all of this?

The first $12000 or so for a single person will be in the 0% bracket given the Standard Deduction and then the effective tax rate for income above $12,000 will increase from 0%.

Hope this helps.

-gauss

 

[VanWinkle]

Yes, there are some Qualified Dividends in the income.

Your non dividend income must be lower than your standard deduction so the only thing left is a portion of you dividends which is taxed at zero up to a certain income.

 

[homestead]

And just to make sure, are you taking into account the Standard Deduction (assuming that you don't itemize deductions) in all of this?

The first $12000 or so for a single person will be in the 0% bracket given the Standard Deduction and then the effective tax rate for income above $12,000 will increase from 0%.

Hope this helps.

-gauss

Married filing jointly. Plus I think being seniors they add an amount to the STD deduction.

 

[travelover]

...... Plus I think being seniors they add an amount to the STD deduction.

You get a deduction for a sexually transmitted disease?

 

[homestead]

You get a deduction for a sexually transmitted disease?

Only for seniors!

 

[oldtimer]

Your 1040 form is divided into 6 main sections.
a) income
b) adjustments to income
c) deductions (standard or itemized)
d) total tax from remaining ordinary income and capital gains tax
e) tax credits

f) tax amount owed or refunded

 

[Bruno]

Taxes in taxable brokerage account.

These are such a basic questions but ones I am not sure of the answers. Being a buy and hold type person I have never sold anything in my taxable brokerage account. ALL these question are in taxable acct.

1. So if i sell a stock or MF worth $1000 I am on the hook for taxes if it just set in taxable acct. until i reinvest it? Or would the tax be due in that year it was sold?

2. How are the taxes figured? I sell a share for $100. but the cost basis says i paid $40. Are my taxes figured on $60 per share?

3. If i choose to get cash instead of reinvesting the Div. or CG how is tax figured on that money where i already get a 1099 each year.

I dont plan on selling anytime soon but think it would be important to understand my Tax Liability just in case my wife quits working.

Thanks.
Bruno

 

[SecondCor521]

These are such a basic questions but ones I am not sure of the answers. Being a buy and hold type person I have never sold anything in my taxable brokerage account. ALL these question are in taxable acct.

1. So if i sell a stock or MF worth $1000 I am on the hook for taxes if it just set in taxable acct. until i reinvest it? Or would the tax be due in that year it was sold?

2. How are the taxes figured? I sell a share for $100. but the cost basis says i paid $40. Are my taxes figured on $60 per share?

3. If i choose to get cash instead of reinvesting the Div. or CG how is tax figured on that money where i already get a 1099 each year.

I dont plan on selling anytime soon but think it would be important to understand my Tax Liability just in case my wife quits working.

Thanks.
Bruno

1. If you sell it for more than it cost, then that will result in capital gains. Capital gains generally incur taxes at the capital gains brackets and rates at the federal level and often ordinary income tax rates at the state level.

2. Yes, only on the gain amount.

3. Dividends and capital gains are taxed in the year you receive them.

All of the above is true whether you choose to keep the cash or reinvest it into the same or another investment.

If you reinvest a $X dividend into an investment (let's call it Y shares of mutual fund Z), that amount $X becomes your cost basis for those shares, so later when you sell those Y shares of mutual fund Z for $W, you'll only have capital gains on the increased value of $W - $X.

 

[RunningBum]

To add to the above,

1. When you sell, that's the end of that transaction. At tax time for that year you'll figure out the gain or loss and whether it's long term or short term. There's no way to defer the taxable event by reinvesting the proceeds. The reinvestment is a new transaction, no different from putting new money in your account and buying a fund.

3. Whether you reinvest Div/CG distributions or take them in cash, you have the same taxable event for the distribution. Reinvestment the same as taking the cash and using it to buy new shares. The holding company just did that automatically but you still have two transactions: 1) The Div or CG distribution, which is taxable and 2) buying new shares, which is an open transaction and is not taxable until you sell those shares. The 1099 looks the same for the dividend whether you reinvest or not.

 

[pb4uski]

Yes, there are some Qualified Dividends in the income.

So your qualified dividends are 0% and your ordinary income (taxable income less qualified dividends and LTCG and LTCG distributions) is less than the standard deduction so your ordinary income isn't taxed either.

 

[homestead]

So your qualified dividends are 0% and your ordinary income (taxable income less qualified dividends and LTCG and LTCG distributions) is less than the standard deduction so your ordinary income isn't taxed either.

I am ending up with about $300 on line 15 taxable income after the standard deduction is subtracted from agi. There must me more calculations done after line 15 that bring the tax to zero.

 

[scrabbler1]

I am ending up with about $300 on line 15 taxable income after the standard deduction is subtracted from agi. There must me more calculations done after line 15 that bring the tax to zero.

Those "more calculations" are probably found in the Qualified Dividends and Cap Gain Tax Worksheet, found on page 36 of the instructions. That worksheet separates QD and LTCG income from your other income and determines the taxes due on each part before adding them together.

It seems very much like what pb4uski and others described. The worksheet will probably show zero taxes due for each part.

 

[gauss]

Did you have any earned income this year (ie W2 or Schedule C)?

If so, in 2021, the age limit has been removed for an Earned Income credit.

Also if your Earned Income was lager in 2019 than it was in 2021, then you can use the 2019 Earned Income instead.

 

[pb4uski]

I am ending up with about $300 on line 15 taxable income after the standard deduction is subtracted from agi. There must me more calculations done after line 15 that bring the tax to zero.

Yes, there are as scrabbler explains. In short, the $300 is bifurcated into two pieces... preferenced income (qualified dividends and LTCG) and ordinary income.

So for example, let's say that your total income is $28,100, your deductions are $27,800 so your taxable income is $300 and your $28,100 of income includes $500 of qualified dividends.

Your preferenced income is $500 (the qualified dividends) and your ordinary income is $0 (since your deductions exceed)... the preferenced income is taxed at 0% and there is no tax on the ordinary income.

Also, check out https://www.irscalculators.com/tax-calculator

 

[homestead]

Income is SS, pension, roth conversion & dividends & interest.
ok, that makes sense. The thing that confused me, I wasn't expecting them to include income that was not taxable in the taxable income line. I thought all that was taken out earlier.
Probably comes from the fact back in the 70's & 80's I did my taxes the hard way without software and and without any dividends. When I got to the taxable income I just looked it up on a table.
Thanks for all the replies.