Do all capital gains count as regular income?

[koralcem]

I apologize if this is a stupid question, but last year was the first time we had capital gains. We used Turbo Tax to do our filing, and I recently was curious enough to crack open and see what actually got filed with the IRS.

On IRS form 1040 for 2016, capital gain or loss is reported on line 13. Line 22 asks that you sum all amounts from line 7 to 21, and that is your income. That number then rolls forward to calculate adjusted gross income, which in turn is used to calculate tax owed. In our case the single figure for capital gains on line 13 included both short and long term capital gains. Did both the short and long term gains get rolled up into "income" and taxed at our regular income tax rates?

When I take our "taxable income" on line 43 and input it to the tax bracket tables, the number I come up with doesn't match the "Tax" amount on line 44 calculated by Turbo Tax. Could that discrepancy be because TT correctly calculated less tax owed for the long term capital gains? If so, is that calculation not shown anywhere in the tax paperwork?

Essentially, is it the case that "taxable income" on line 43 can actually be made up of components taxed at different rates?

[Paul der Krake]

Yes. If you read the instructions for form 1040 line 44, you will find a worksheet that explains how to calculate your tax if you have capital gains. Turbotax handled it for you behind the scenes.

[respond2u]

...
Essentially, is it the case that "taxable income" on line 43 can actually be made up of components taxed at different rates?

Yes! Under current tax law (since 2003), long term capital gains (profit on shares held more than a year) and dividends are taxed at a substantially lower rate than regular passive income. Short term capital gains (profit held for less than a year) are taxed as regular passive income. (Passive here means not susceptible to payroll taxes of social security and medicare).

That lower rate for dividends is a great boon for frugal RE, as it's 0% if you're in the 10% or 15% tax brackets (AGI of 38K for a single person). It's one of the reasons why dividend growth investing is popular.

[MDM]

When I take our "taxable income" on line 43 and input it to the tax bracket tables, the number I come up with doesn't match the "Tax" amount on line 44 calculated by Turbo Tax. Could that discrepancy be because TT correctly calculated less tax owed for the long term capital gains? If so, is that calculation not shown anywhere in the tax paperwork?

It's not in the "needed for filing" paperwork, but if you have TT save a pdf with "all worksheets" (or something like that), you should find the "Qualified Dividends and Capital Gain Tax Worksheet" and that's what you want.

[koralcem]

Thanks folks for the clarification. One more follow up: Even if portions of it are taxed at different rates, do capital gains still count as income, in the sense that they raise your AGI/MAGI? For example, if you were otherwise eligible to contribute to a Roth IRA, can having a lot of capital gains make you ineligible to contribute, if you had so much that it pushed your total over the income limit on Roth contributions? Does it similarly mess with everything else that depends on income such as child tax credits, ACA credits, college financial aid, the various education tax credits, the Earned Income Tax Credit, etc.?

[MDM]

Thanks folks for the clarification. One more follow up: Even if portions of it are taxed at different rates, do capital gains still count as income, in the sense that they raise your AGI/MAGI?

Yes.

For example, if you were otherwise eligible to contribute to a Roth IRA, can having a lot of capital gains make you ineligible to contribute, if you had so much that it pushed your total over the income limit on Roth contributions?

Yes.

Does it similarly mess with everything else that depends on income such as child tax credits, ACA credits, college financial aid, the various education tax credits, the Earned Income Tax Credit, etc.?

Yes.

E.g., see the front page of your Form 1040 and Modified Adjusted Gross Income for Roth IRA Purposes.

[teen persuasion]

Thanks folks for the clarification. One more follow up: Even if portions of it are taxed at different rates, do capital gains still count as income, in the sense that they raise your AGI/MAGI? For example, if you were otherwise eligible to contribute to a Roth IRA, can having a lot of capital gains make you ineligible to contribute, if you had so much that it pushed your total over the income limit on Roth contributions? Does it similarly mess with everything else that depends on income such as child tax credits, ACA credits, college financial aid, the various education tax credits, the Earned Income Tax Credit, etc.?

EITC is an extra special case - investment income greater than $3400 completely disqualifies you from eligibility for any EITC.

[bluemars]

Capital gains (CG) and qualified dividends(QD) are taxed favorably compared to ordinary income with maximum  rate 20%. If  you are in 15% tax bracket, there is no tax on CG or QD.  Here are few examples that show how taxes are calculated when you have CG and/or QD.

http://www.capitalcalc.com/taxltcgqvi