Long term capital gains - nuts and bolts

[lifeplus]

Curious if I'm reading this right. Does long term captial gains work like this:

1. If you file taxes for 2020 as married filing jointly and you make $80k in taxable income, any long term capital gains is taxed at 0%?
or
2. No matter what your earned income is you can take up to $80k at 0% tax for a married couple filing jointly?
or
3. Something different that I'm not understanding.

LTCG Rates:
https://www.kiplinger.com/taxes/capital-gains-tax/602224/capital-gains-tax-rates-for-2020-and-2021

 

[seattlecyclone]

Something different. The brackets sort of sit on top of each other. You look at your taxable income first without regard to any capital gains/qualified dividends. If this amount is $70k, for example, then you get $10k of free capital gains, and then pay 15% on amounts above and beyond this.

[terran]

Also remember that you get the standard deduction, so any combination of income that stays under $80,000 + $24,800 = $104,800 will me that the long term capital gains under that amount after being on top of other income will be taxed at 0% at the federal level in 2020.

[lifeplus]

@seattlecyclone so, if I make $75k in taxable income and have 20k in LTCG, that 5k would be taxed at 0% nd 15k would be taxed at 15%. Is this correct?

@terran my wife and I are high income earners. I own a business that I am in the midst of selling this year. It will yield quite a bit of LTCG. I'm trying to find the best way to minimize taxes as this will help us to reach our FI goals with the sale of this asset. Any thoughts or resources you can point me to would be most welcomed. Thanks.

[seattlecyclone]

@seattlecyclone so, if I make $75k in taxable income and have 20k in LTCG, that 5k would be taxed at 0% nd 15k would be taxed at 15%. Is this correct?

Yep.

[reeshau]

@terran my wife and I are high income earners. I own a business that I am in the midst of selling this year. It will yield quite a bit of LTCG. I'm trying to find the best way to minimize taxes as this will help us to reach our FI goals with the sale of this asset. Any thoughts or resources you can point me to would be most welcomed. Thanks.

Have you considered taking payment over two years?  Usually a payment plan would be to the benefit of the buyer, but I don't think it would be unusual to manage taxes in this way.  Of course, you would need to get some appropriate mechanism / contract language to do that.

The other thing you could do do a large charitable donation, that would reduce the underlying income, so replace that rather than the lower cap gains rate.  If you had nobody in mind, you could do a donor advised fund to get credit for it this year, and make it a retirement hobby to dole it out.

[Wile E. Coyote]

@seattlecyclone so, if I make $75k in taxable income and have 20k in LTCG, that 5k would be taxed at 0% nd 15k would be taxed at 15%. Is this correct?

@terran my wife and I are high income earners. I own a business that I am in the midst of selling this year. It will yield quite a bit of LTCG. I'm trying to find the best way to minimize taxes as this will help us to reach our FI goals with the sale of this asset. Any thoughts or resources you can point me to would be most welcomed. Thanks.

Are you selling stock in a corporation.  If so, take a look to see if you would qualify for Section 1202.  If not, make sure you understand what assets/interests you are selling.  It may not all be LTCG. 

[MustacheAndaHalf]

Since your income determines the bracket where you pay LTCG, you can take the difference of two numbers to get your tax.  First add your income and long-term gains, and note the tax for that combination.  Now lookup the tax owed if your income was long-term capital gains.  The difference between those two should be what you owe.

Note besides the 0% / 15% / 20% LTCG taxes you see, there's a net investment income tax of 3.8% that kicks in at $200k single / $250k MFJ.  With a high income, expect to pay 18.8% to 23.8% on long-term gains.

[Niceday]

For someone who has no income, e.g. retired, but has LTCG only, how does that work?  For example, if I only have $200,000 LTCG but no wages, is all of the $200k taxed at 0%?  Or is it the first 80k is taxed at 0% and then $120k taxed at 15%?

[markbike528CBX]

For someone who has no income, e.g. retired, but has LTCG only, how does that work?  For example, if I only have $200,000 LTCG but no wages, is all of the $200k taxed at 0%?  Or is it the first 80k is taxed at 0% and then $120k taxed at 15%?

https://engaging-data.com/tax-brackets/

Married Filing Jointly, 2021:
25.1K Std deduction 0 tax
next 80.8K  Capital gains 0% 0 tax.
next 94.1K  Capital gains  15%   $14,115 tax.

Caveat:  LTGC as noted above should only be qualified publicly traded stock shares.  Anything else and more talented people than I would have to chime in.
It would be difficult to have that level of LTCG and not have any dividends.   Qualified dividends make up about 95% of VTSAX. But those can be hidden in the standard deduction.

[Niceday]

https://engaging-data.com/tax-brackets/

This is a very nice tool.  Thank you.

[markbike528CBX]

https://engaging-data.com/tax-brackets/

This is a very nice tool.  Thank you.

Your welcome.  Forum member @CCCA  is the the provider.   Lots of other data fun is provided at that same site.

[phildonnia]

Curious if I'm reading this right. Does long term captial gains work like this:

1. If you file taxes for 2020 as married filing jointly and you make $80k in taxable income, any long term capital gains is taxed at 0%?
or
2. No matter what your earned income is you can take up to $80k at 0% tax for a married couple filing jointly?
or
3. Something different that I'm not understanding.

Capital gains are "stacked" on other income before applying the brackets. 

As an illustration, suppose you have $50k in ordinary income and $50k in LT capital gains.  In this scenario, the first $30k of LT capital gains would fall under $80k, and would be taxed at 0%.  The remaining $20k of LT capital gains that pokes above the $80k threshold would be taxed at 15%.

[secondcor521]

Qualified dividends make up about 95% of VTSAX. But those can be hidden in the standard deduction.

While true, it implies that qualified dividends are taxed like ordinary income.  They aren't; they're taxed like LTCG (excepting that LTCL don't offset them).  Look at the mechanics of the Qualified Dividends and Capital Gain tax worksheet.

[markbike528CBX]

Qualified dividends make up about 95% of VTSAX. But those can be hidden in the standard deduction.

While true, it implies that qualified dividends are taxed like ordinary income.  They aren't; they're taxed like LTCG (excepting that LTCL don't offset them).  Look at the mechanics of the Qualified Dividends and Capital Gain tax worksheet.

Seconcor521 (nice number by the way).   
Should say Unqualified (Ordinary minus Qualified) dividends make up about 5% of VTSAX. But those can be hidden in the standard deduction.