How is long term capital gains tax rate computed?

[surprising]

I am walking through the Qualified Dividends and Capital Gain Tax Worksheet to fully understand how the tax rate is computed. It seems the amount that qualifies for 0% is adjusted by your ordinary income. So if you have $100K LTCG and $50K ordinary income, the max amount that qualifies for 0% is (0% limit from table) - (ordinary income), or ($89,250 - $50K = $39,250) for married filing jointly for this scenario. The rest ($100K - $39,250 = $60,750) will be taxed at 15%.

It makes sense, but really limits it's effectiveness. Somehow I was thinking that as long as your ordinary income was below $89K for married filing jointly, all of your LTCG would be 0%, but I guess that would be a crazy loophole.

So in summary the maximum amount of LTCG that can be taxed at 0% is the limit from the table (44K single, 89K married jointly..), and any ordinary income you have reduces the maximum amount. Does it sound right?

 

[Gumby]

This may help you better understand how Capital Gains and Qualified Dividends are stacked on ordinary income to figure out your taxes.

The Tax Impact Of The Long-Term Capital Gains Bump Zone

 

[Taco]

I am walking through the Qualified Dividends and Capital Gain Tax Worksheet to fully understand how the tax rate is computed. It seems the amount that qualifies for 0% is adjusted by your ordinary income. So if you have $100K LTCG and $50K ordinary income, the max amount that qualifies for 0% is (0% limit from table) - (ordinary income), or ($89,250 - $50K = $39,250) for married filing jointly for this scenario. The rest ($100K - $39,250 = $60,750) will be taxed at 15%.

It makes sense, but really limits it's effectiveness. Somehow I was thinking that as long as your ordinary income was below $89K for married filing jointly, all of your LTCG would be 0%, but I guess that would be a crazy loophole.

So in summary the maximum amount of LTCG that can be taxed at 0% is the limit from the table (44K single, 89K married jointly..), and any ordinary income you have reduces the maximum amount. Does it sound right?

I'm not an accountant, but my understanding is...

For 2024, the top of the 0% bracket for Married Filing Jointly has increased to 94,050 - from 89,250 in 2023.
Also, you have the standard deduction to consider which is 29,200 for 2024.

So, if your only income was Long Term Cap Gains, you could have 94,050 + 29,200 = 123,250 of gains before any were taxed.
Or, if you had 50K of regular income, you would have 73,250 of headroom in the 0% LTCG bracket before additional gains got taxed at the 15% rate.

 

[surprising]

This may help you better understand how Capital Gains and Qualified Dividends are stacked on ordinary income to figure out your taxes.

The Tax Impact Of The Long-Term Capital Gains Bump Zone

That's a great article and really confirmed what I was seeing.

 

[SecondCor521]

This visualization is pretty helpful too:

Understanding Tax Brackets: Interactive Income Tax Visualization and Calculator - Engaging Data

This interactive, visualization shows you how your income is split into the various tax brackets for both regular and capital gains taxes.

engaging-data.com