Question

Still confused on Capital Gains (long) Tax.

Forum|Forum|2 years ago
December 14, 2023
3 replies
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Hi, again. I’ve sought answers here before and you all have been wonderful. I am utterly confused!

I am in NC where long term (CG) capital gains would be taxed as general income at a flat 5.25% rate.

Federally, I’m lost. We are married, filing jointly. Our income is well below the O% capital gains tax rate on (LT) long-term shares (for 2023, 0% up to a combined income of $89,250.)

I understand LT CG “cannot push you into a higher tax bracket.” I understand LT CG are taxes (if at all) separate from income, and are addressed on the 1040 schedule D.

Yet, when I look to validate this, I’m finding conflicting info. When I try the numerous CG tax calculators (knowing they’re flawed, but wanting an idea), they are ALL taxing me at a rate which indicates the CG are added to our income, and taxing us NOT at the 0% federal tax rate for LT CG, but at the next tier. Some of these calculators go so far as to ask for 401k contributions (~$1k), number of kids (2), itemized deductions (we’ll take standard deduction, etc…

There is no capital gains tax in North Carolina; the gains are included as income and taxed at the flat income tax rate of 5.25%.

I feel like many articles and even responses split hairs in a way that leaves me not understanding what is probably quite simple.

So, married, filing jointly in NC. Income is well under the threshold (of $89,250) affording a 0% federal tax rate on LT CG.

Where am I going wrong?

Simply put, if our income is so low, and we fall within the 0% LT CG tax rate:

1) do we indeed pay ZERO federal taxes on the LT gains?

2) is there a max/limit on how much stock we can sell at 0% federal tax?

3) do the capital gains ACTUALLY end up bumping us up to a new tax bracket (despite what I wrote above and have read many times), and in that case, are we subjected to LT CG tax after all?

For round numbers as an illustration… let’s assume our joint income is $50k. Assume we sell all of our stock for $100k in long term capital GAINS. Our income is taxed normally, then NC would tax us at a flat 5.75% rate on those gains. However, wouldn’t the federal income tax on the entirety of the gains (all $100k) be taxed at 0% due to our low income and the LT CG tax rates for 2023?

Please help! It’s got to be simple, but I have read a concerning number of articles from seemingly reputable financial agencies and tax agencies, and info in the forums, that tell me I’ve got this all wrong. And if I do t have it wrong, why can’t I find a single tax calculator/estimator whose output is 0% for the LT CG.

Thank you in advance!

rjs

Employee

On your federal tax return, long-term capital gain will not push your ordinary income into a higher tax bracket.

The tax rate on your long-term capital gain is determined by your total taxable income, including the long-term gain.

In your example, some of the long-term capital gain will be taxed at the 15% rate because your total taxable income, including the capital gain, will be more than $89,250. But you have to calculate your taxable income. Taxable income is your total income minus adjustments (if any) and either itemized deductions or the standard deduction. We can't calculate the tax because you have not given enough information to calculate the taxable income.

M

Mike9241

@heather64 you are not correct ordinary income can push LT capital gains from being taxed a 0% to being taxed at a higher %

examples for 2023 using standard deduction

1) $40K ordinary income

$70K of LTCG

tax is about $1200 and only the ordinary income is being taxed

2) $50K of ordinary income

$70K of LTCG

tax is now about $2700

that $10K of additional ordinary income gets taxed at 10%

however that additional $10K pushes over $3K of capital gains into the 15% bracket

a recap of tax a) taxable income 50K + 70K less std deduction of 27.7K = 92.3K

b) LTCG 70K

c) a-b = 22.3K

d) LTCG exclusion 89.25K

e) d-c LTCG taxed a 0% 66.95K

f) b-e LTCG taxed at 15% 3.05K

g) tax on ordinary income of 22.3K using tax tables

Hal_Al

Employee

Among your work sheets, you will have a "Qualified Dividends and Capital Gains Worksheet"* (abbreviated "Qual Div/Cap Gn" on the forms list) showing the tax calculation.

In particular, note lines 9 (the amount of LTCG taxed at 0%) and line 18 (the amount taxed at 15%).

https://media.hrblock.com/media/KnowledgeDevelopment/ITC/2023Forms/2022_Qualified_Dividends_and_Capital_Gains_Tax_Worksheet_line_16_fillable.pdf

*For more complicated returns you will get the "Schedule D Tax Worksheet" (abbreviated "Schedule D Tax").

O

Opus 17

Employee

For round numbers as an illustration… let’s assume our joint income is $50k. Assume we sell all of our stock for $100k in long term capital GAINS. Our income is taxed normally, then NC would tax us at a flat 5.75% rate on those gains. However, wouldn’t the federal income tax on the entirety of the gains (all $100k) be taxed at 0% due to our low income and the LT CG tax rates for 2023?

This is how it works for federal taxes.

With married filing jointly, and $50K of income, you get a standard deduction of $27,700, so your taxable income is $22,300. The top of the 12% ordinary income tax bracket is $89,450.

That means that the first $67,150 of long term gains is taxed at 0% (because $89,450 minus $22,300 equals $67,150). Any capital gains on top of that will be taxed at 15%, since your total taxable income is above $89,450 and therefore in the "regular" 22% bracket, so your LTCG rate is 15% on that part of your gain. But the capital gains does not push your regular income into the 22% bracket.