Tax Questions: 1. Cap Gains 2. Tax Rate

[TromboneAl]

I'm doing my taxes now to help decide how much IRA to convert to Roth. Two Questions:

1. My understanding is that capital gains are taxed at a different rate from ordinary income. Then why is it that I'm seeing the capital gains (1040 line 13) simply added together with wages to get the total income?

2. Currently my taxable income for 2007 comes to $3,474. I'd expect, then, that my tax would be 10% of this, or $347. However, Taxact calculates it as $174, which corresponds to a tax rate of 5%. What am I misunderstanding?

Thanks!

 

[FIRE'd@51]

Line 13 shows the net total capital gain (both LT and ST) which is included in your Adjusted Gross Income. Note that line 13 also says "Attach Schedule D". On Schedule D you will be asked to fill out a worksheet which will reduce the LT cap gains rate to 5% for the portion which falls into the 10% and 15% brackets and to 15% for that which falls into higher brackets. A similar calculation is done for qualified dividends, which are taxed at the same rates as LT cap gains.

Evidently, your taxable income (after deductions and exemptions) is all LT gains and qualified dividends which are taxed at only 5% since your entire taxable income falls into the 10% bracket. To see the actual calculation, you would have to look at the supporting worksheets in TaxAct.

 

[TromboneAl]

Very good. Thanks.