0% taxes on Cap Gains and Qualified Dividends while in 15% ordinary tax bracket?

[Zoid]

I have officially reached FI-dom and am absorbing as much of this as I can. This is all excellent material, thanks everyone for all the content on this site and the forum. That being said I have looked around and around for confirmation on something and I just can’t seem to find it anywhere. I file as single and this year am going to keep my income low enough to stay in the 15% ordinary tax income bracket. My question is for that bracket is the 0% tax rate on long term Cap Gains and Qualified Dividends unlimited? GoCurryCracker mentions in his post (http://www.gocurrycracker.com/never-pay-taxes-again/) that when you file jointly it is limited to $70,700 per year. I can’t seem to find any limits anywhere in the IRS forms or website and just wanted to try and get confirmation before I start realizing long term Cap Gains to do some Tax Gain Harvesting and move funds from my 401k and Traditional IRA to my Roth IRA. Don’t want to think it is 0% and then get hit with some limit that I was unaware of. What has been everyone else’s experience on this?

Can anyone point me to something on the IRS website or something that outlines any limits on that 0% rate? Fingers crossed it is unlimited, but can’t believe it would be.

Thanks everyone!

[seattlecyclone]

It's not unlimited. Once your capital gains and dividends are high enough to push your total income up past the top of the 15% bracket, any further capital gains/dividends are taxed at the 15% rate that applies to income in the 25-35% brackets.

Example:
Married filing jointly
$50k ordinary income +
$50k long-term gains =
$100k AGI
Standard deduction + two personal exemptions = $20,700
Taxable income = $100k - $20,700 = $79,300
The first $29,300 of this is taxed in regular income tax brackets:
First $18,550 at 10%, next $10,750 at 15%.
Now you have $46,000 of the 15% bracket left for your capital gains. This bit is taxed at 0%.
The $4,000 that goes over the top of the 15% bracket will be taxed at 15% (which is the capital gains rate for the 25-35% brackets).

[MDM]

The charts below show the marginal tax rates, assuming a single person <65 years old, for
1) tIRA withdrawals if you have $30K LTCG
2) LTCG if you have $30K tIRA withdrawals





You can try your own "what if?"s in the case study spreadsheet or TaxAct, TurboTax, etc.

See the Qualified Dividends and Capital Gain Tax Worksheet on p. 44 of 2015 Instruction 1040 - i1040gi.pdf for the IRS version.

[markbike528CBX]

I agree that it is nowhere baldly stated in IRS/official literature that <15% bracket has both dividends and cap gains taxed, (but at 0%).

I have spreadsheeted form 1040, and the associated Qualified Dividends and Capital Gain Tax Worksheet on p. 44 of 2015 Instruction 1040 - i1040gi.pdf for the IRS version.  <<< thanks MDM for the quote clip.

Net up shot, just like others have said, if you have <20K (married, filing jointly) ordinary income, then you can have loads (about 70K of capital gains/dividends) and pay ZERO taxes.

going to try the case study spreadsheet, it is probably better than mine.

[Zoid]

THanks for the replies, all great info and I appreciate the help with this. My actual undergraduate degree is in Finance, yet I can't seem to decipher the way the tax forms work. Following all the "subtract line X from Y" and "input the smaller of A or B into line G" is difficult to follow. That being said I just read since my first post in this thread GoCurryCracker's 2014 Tax returns post (http://www.gocurrycracker.com/go-curry-cracker-2014-taxes/) and me seems to imply that the amount specified in Line 8 of the Qualified Dividends and Capital Gain Tax Worksheet is the amount of tax free LTCG and QD you can have taxed at 0%. Which if I look back at my 2015 return would be:

$37,450 for single or married filing separately
$74,900 for married filing jointly
$50,200 for Head of Household

Seattlecyclone's post was easy to follow and made sense, but after seeing the worksheet is that the number that is allowed for 0% tax LTCG and QD?

Sorry if I'm just slow to get this

[MDM]

...the amount specified in Line 8 of the Qualified Dividends and Capital Gain Tax Worksheet is the amount of tax free LTCG and QD you can have taxed at 0%.

That is correct - if you have no income other than LTCG and QD.

If you have "ordinary" (i.e., not LTCG or QD) income, you have to subtract that from the Line 8 number to find the amount of tax free LTCG and QD you can have taxed at 0%.  Line 11 gives that number.

[terran]

Capital gains and dividends are still income and they're still "taxed" it's just that the amount that falls within the 15% earned income tax bracket is taxed at 0% for capital gains and dividends. So the limits are the same as those that mark the line between the 15% and 25% bracket, and remember to include all income (like traditional IRA withdrawals and conversions to roth) in that income.

[MustacheAndaHalf]

$74,900 for married filing jointly

The last $100 of $74,900 of dividends is taxed at 0%, so you paid $0.  The $100 dividend to go over that limit is taxed at 15%, so $15 owed.  But going over that limit by $100 has no effect on the rest of the $74,900.  If you had dividends of $75,000 you owe $15 tax.

Note I'm using your figures, rather than look them up, because I want to convey the concept - not verify numbers.  Once you include the standard deduction ($12k) and two standard exemptions ($4k/person), the limit is probably closer to $95k.

[Zoid]

Thanks everyone, this clears it up. To net out my specific scenario it appears that filing as single for 2016, the upper limit for me to remain in the 15% bracket is $43,950 ($37,650 which is the upper limit of the 15% bracket + my standard deduction of $6,300). Whatever I have left over after subtracting out my income sources (rental income, short term cap gains, non-Qualified Dividends, plus other small things) will be the amount of LTCG and Qualified Dividends that I should be able to realize at 0% tax.

For the first time ever I think I am actually looking forward to tax time.

[MDM]

... it appears that filing as single for 2016, the upper limit for me to remain in the 15% bracket is $43,950....

You also get a $4,050 personal exemption so $48,000 is your AGI upper limit to stay in the 15% bracket. 

Note that if you already have $30K in capital gains, your marginal rate on ordinary income between $20K and $48K is 30% despite you being in the "15% bracket."  See the chart in an earlier post.