Can you take standard deductions on your capital gains combined with your income?

Forum|Forum|6 years ago
October 4, 2019
1 reply
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Ok, so bear with me.

Let's say someone is filing jointly with their spouse and they sell their house for $205,000 with a purchase price of $120,000 (and they sold it after a year and a half). That would make the gain $85,000.

The same couple earns $65,000 combined during the year through income.

So, that makes their income $150,000 because the capital gain of $85,000 is a long-term gain.

Ok, so now here is where things get tricky. The brackets for their gain is anything above $78,751. So, their new taxable gain is $71,249, putting that amount in the 15% bracket (correct? Or would the whole $85k go into that bracket?)

Can this couple also take the standard deduction (given that their itemized deductions don't exceed the standard) to bring the taxable gain down to $46,849? Or would the standard deduction first touch the actual income and then the gain? How does that work? Could they take a standard deduction on their combined income excluding the gain and then itemize the gain?

Also, because they make $65k combined, but there is still $13,750 left to reach the 15% margin, are they paying 0% or their normal 12% on the $78,750? Or only on the $65k and the rest of the roughly $13k goes to the 15%?

I really hope this makes sense. If it's a graduated bracket system like I think, then that's great. I did everything right. If not, then I'm severely confused.

Thanks!

VolvoGirl

Employee

If they sell their primary house and lived in it 2 out of the last 5 years they get to exclude up to $500,000 of Gain on a Joint return. So they might not owe any tax or capital gains on it.

The Standard Deduction is subtracted from your AGI. Then the tax is calculated on the Taxable Income. But the tax on any capital gains is calculated separately. It's complicated.

Even though the full amount shows up as income on the 1040 as income, if you have capital gains or qualified dividends the tax on line 11 is not taken from the tax table but is calculated separately from schedule D. The tax will be calculated on the Qualified Dividends and Capital Gain Tax Worksheet. It does not get filed with your return. In the online version you need to save your return as a pdf file and include all worksheets to see it.