Capital gains impacting qualified dividend tax threhold

Forum|Forum|7 years ago
February 15, 2019
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So assume have 44k in interest income (less 24 std deduction) gives 20k net income..

If have 100k in long term capital gains... will be tax free until hit 78k threshold

However turbo tax implies the rate on qualified dividends remains at zero because income is under 78k and there suggest long term capital gains are not taken into consideration when calculating the threshold for tax rate on qualified dividends

N

NCPERSON1

I am not sure what you are getting at but I am going to take a stab at it. (all comments assume filing married joint and that the capital gains are all long term gains)

1) The capital gains rate is zero for the 1st $77,200 of income

2) However, that benefit is 'crowed out' if there is any other earned income.

3) so if your capital gains is the sole source of income, then $100,000 of capital gains pays no tax. (you can check this in TT). In fact, that would be true up through $101, 200 because of the $24,000 deduction afforded joint married filers.

4) if you have interest income of $44,000, that 'crowds out' some of the $100,000 of capital gains from being tax free.

- you would pay ordinary taxes on $20,000 (as you stated, $44,000 less the joint deduction of $24,000)

- no tax on capital gains tax on $57,200 ($77,200 less $20,000)

- 15% capital gains rate on the remaining $42, 800 ($100,000 - 57,200).

4) Then let's say there is $10,000 of dividends and further that this $10,000 is all 'qualified dividends'.

- again, you pay ordinary taxes on $20,000 (as you stated, $44,000 less the joint deduction of $24,000),

- no tax on capital gains of $57,200 ($77,200 less $20,000)

-15% tax due on the qualified dividends of $10,000 as well as the the remaining $42, 800 ($100,000 - 57,200).

i guess you could state that there is no tax on the qualified dividends but then that 'crowds out' another $10,000 of capital gains, so the capital gains tax is based on $52,800. the net effect is the same

you can see the math on schedule 'Qual div/ cap gn' in forms view in the Desktop version. The capital gains and the dividends are all lumped together on lines 2 and 3 in any event because the tax rate is the same

<< However turbo tax implies the rate on qualified dividends remains at zero because income is under 78k and there suggest long term capital gains are not taken into consideration when calculating the threshold for tax rate on qualified dividends>>

I guess I don't follow your statement that 'qualifies dividends remains at zero' - it doesn't - look at the math in the schedule I note above

I am answering your question?

A

asquith62Author

Employee

Thanks that was helpful..

Trying to work out tax planning.. over next decade..

So you are suggesting qualified dividends and capital gains are added to (earned income, ordinary dividends and interest).. and therefore anything above 77,200 (net) would mean paying 15 pct tax on (qualified dividends and capital gains)

I was thinking/hoping that if interest and capital gains came to less than 77,200 (after 24k deduction) then the qualified dividends would be tax free.. (regardless of amount) but that does not seem right . as you note they are added together. Using on line turbo tax for first time, so not up to speed...

N

NCPERSON1

<<So you are suggesting qualified dividends and capital gains are added to (earned income, ordinary dividends and interest).. and therefore anything above 77,200 (net) would mean paying 15 pct tax on (qualified dividends and capital gains)>>

that is correct .... and to be technical, it's long term capital gains. short term capital gains would be treated as regular earned income

as noted in my example and can follow it on the IRS form I noted below, the zero tax benefit is 'crowded out' by ordinary income.