[Bonk]

I just worked through a question on capital gains and I used Schedule D this time to see how it all works. What confuses me is that the number ends up on line 13 of Form 1040. If net long term capital gains are only taxed at 0%,15%, 20% 25%, or 28% why do they enter into your AGI? Wouldn’t this cause them to be taxed at your normal tax rate anyways? This has confused me ever since I learned about LTCG’s in college and I have never been able to put my thumb on it!

Thank you!

FAR: 85
BEC: 84
AUD: 74, 83
REG: ??

[taxgeek83]

In the case of a taxpayer with LTCG, one of the following worksheets is used to calculate tax on all taxable income:

https://www.irs.gov/pub/irs-prior/i1040gi–2015.pdf#page=44

https://www.irs.gov/pub/irs-prior/i1040sd–2015.pdf#page=15

[Anonymous]

My theory:

They're in AGI so that your tax rate is based on those earnings in addition to your regular earnings, so that you can't make $500,000 per year of LTCG and $5,000 of regular income and stay in an almost non-existent tax bracket.

EDIT: I'd included what I could find about the worksheet, but since taxgeek probably really knows what he's talking about (instead of me looking at the forms to figure it out as I go), I'm editing out what I wrote about the forms – use his links instead. 🙂 haha.

[Anonymous]

I had this same problem – truth be told It was in my “not learning this” basket.

Dangerous though, because it is the type of thing that is ripe for a SIM – but … it is also something that is changing constantly in the tax law so it's difficult to test (e.g., how do you pretest a question when the applicable rates are changing all the time.)

I would know that net capital gain income refers to the short term gains when there are long term losses.

[Author]

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