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The tax rate for capital gains is 0% if your total taxable income is below $77,200 (if married filing jointly). But does "total taxable income" include capital gains, or not?

For example, suppose my other income sources total up to $70,000, and I also have $50,000 in capital gains. Which of the following descriptions is correct?

  • My total taxable income is less than $77,200, so the $50,000 in capital gains is untaxed.
  • My total taxable income is $120,000, which is above the $77,200 threshold, so I pay taxes on the capital gains.
Chris W. Rea
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mweiss
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    Possible duplicate of How are long-term capital gains taxed if the gain pushes income into a new tax bracket? – Shorlan Apr 11 '19 at 21:26
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    @Shorlan — that question is from before the new 2018 tax law. The new law completely changes how taxes on capital gains are taxed. – Pete Becker Apr 11 '19 at 21:47
  • @PeteBecker: the only thing TCJA changes in this area is reducing the percentage rates on 'ordinary' (not long-gain or qual-div) income, thus slightly reducing the relative benefit for long-gain and qual-div. All other rules are the same. The bracket amounts change each year for inflation, but that was already true. – dave_thompson_085 Apr 12 '19 at 14:05
  • Wouldn't make sense if not, eh ? I have no income because I live off of capital gains. I make $10B/year on capital gains, but it's untaxed. Pretty sure there would be riots in the streets if buffet paid 0 taxes but you have to pay income tax off of your min wage job :p – xyious Apr 12 '19 at 15:50
  • @xyious: That's exactly how payroll taxes work -- minimum wage workers pay FICA/Social Security/Medicare and people making investment gains do not. – Ben Voigt Apr 12 '19 at 19:05
  • @dave_thompson_085 — the tax rate on long-term capital gains now depends on your “taxable income”, which now includes all of your capital gains and losses. – Pete Becker Apr 12 '19 at 19:30
  • @PeteBecker: the rate for long-gain and qual-div depends on which bracket(s) it falls in, treating your other income as coming first i.e. 'using up' the deductions and lower bracket(s), and that's been the same since I started reporting such income in 1998, although rates have changed from time to time and the brackets change every year as I said. This scheme did not change in 2018. Please specify what you think is different. – dave_thompson_085 Apr 13 '19 at 05:07
  • @dave_thompson_085 -- I suggest you look at how capital gains taxes are calculated for 2018. Different isn't the same. – Pete Becker Apr 13 '19 at 11:58
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    @PeteBecker: I have not only looked at but done this computation for the past 12 years. Capgains tax is computed on the Qualified Dividend and Capital Gain Tax Worksheet (QDCGTW) in the 1040 instructions in most cases and the Schedule D Tax Worksheet in the schedule D instructions for some complex cases. Both of these for 2018 are line for line identical to 2017 and 2016 except the bracket amounts (in 8 and 15 or 15 and 24 respectively) and the line number references to 1040 because in 2018 1040 was rearranged but the references are still to the same data. ... – dave_thompson_085 Apr 14 '19 at 00:05
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    ... There is thus NO DIFFERENCE except for the brackets, and the bracket change is not due to the 2018 (really Dec. 2017) law. Given your persistent refusal to give any specifics, I'm not going to waste my time digging the earlier years out of storage to confirm my knowledge that your claim is entirely wrong. – dave_thompson_085 Apr 14 '19 at 00:08
  • @dave_thompson_085 -- you're right. TurboTax told me I owed zero tax, and that made me suspicious, so I looked into how it was calculated. I hadn't seen that dance in the worksheet to get from taxable income to tax owed before, and I thought I knew how taxable income was calculated in the presence of LTCGs. – Pete Becker Apr 15 '19 at 19:24

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All of your long-term capital gains are included in your gross income. Once you take your deductions (itemized or standard), what’s left is “taxable income”. Then there’s a worksheet to figure out how much of your “taxable income” is actually taxable; that’s where you get the adjustment for your long term capital gains. So, yes, long term capital gains are part of the “taxable income” that is used to determine the rate you pay on those gains.

I just went through this in TurboTax. It showed a “taxable income” of a bit over $40k and no tax due. I had to dig through the additional papers to find that worksheet to see that the result was right, because most of my income was LTCG.

Pete Becker
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  • I'm also using TurboTax -- can you help direct me to where I can find that worksheet? – mweiss Apr 11 '19 at 22:20
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    @mweiss — I’m away from home, so can’t give you details. I used their “print” menu and looked through the list of available forms. From the online documentation here it looks like its title is “Qualified Dividends and Capital Gain Tax Worksheet—Line 11a”. – Pete Becker Apr 11 '19 at 22:33