Long Term Capital Gain Tax Rate?

[Vikas]

I know it is 15% but for the life of me, I can't figure out how the calculations are done by the software. As far as I can see, the capital gains, dividends, distributions etc are all added to the income to come up with AGI. Once the calculations go in to AMT, I lose the trail of it altogether. I see no calculations of the type "multiply line yy by .15" on the Schedule D.

My question:- Which line does the capital gains split out of AGI again? Otherwise as far as I can see, I am getting taxed at my marginal tax rate on the capital gains. The only two subtractions that I see on my 1040 entries are for itemized (or standard) deduction and exemptions. That's it. I hope I am wrong!

I know what IRS publication says but please show me using 1040 and Schedule D as to how it actually accomplishes that.

Am I going senile in my old age or what???

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Capital gains and deductible capital losses are reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, and on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets. If you have a net capital gain, that gain may be taxed at a lower tax rate than your ordinary income tax rates. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. Some or all net capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. However, beginning in 2013, a new 20% rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the new 39.6% ordinary tax rate ($400,000 for single; $450,000 for married filing jointly or qualifying widow(er); $425,000 for head of household, and $225,000 for married filing separately). For more information, refer to Publication 505, Tax Withholding and Estimated Tax.
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[tightwad]

The rate is 15% for those in the 25% and above tax rates except for the new 39.6% rate. There is also the new Medicare tax on investment income of 3.8% on high income filers. This whole calculation is EXTREMELY complicated. There is a Sch. D worksheet that does the calculation. Are you using personal software, like TurboTax? You should be able to find the worksheet in the list of forms and print it out.

EDIT: On the line showing the amount of tax there will be a note showing either "Tax Tables" or "Sch D wksht". With LTCG, yours should note Sch D. The worksheet is filed as part of the return.

 

[datech]

If you are using 1040 long form the tax on line 44 is to be calculated from the instructions booklet page 43--"qualified dividends and capital gain tax worksheet"

Line 20 of the instructions is for the 15% calculation.

The $400,000 threshold is part of that worksheet.

 

[JHZR2]

I cant link you back to a line of code, but have you tried the simple weighted tax calculation?

E.g. $x*0.eff_rate + $y*0.15 = tax due

To see if it links up?

AMT likely is designed to screw it up and make you pay a larger amount regardless of the source. We get hit with AMT, and as I understand it, it is based upon one having too many deductions for the income, more or less, and so may be more of a discounting of your deductions and thus tax basis on a wholesae level than a partitioning of how much you owe due to one kind of gain or another.

Have you downloaded the actual forms or picked up a set from the post office or library? Sometmes going through the real paper form can do wonders...

 

[Vikas]

I have been using the HR Block software for decades. For many years I used to eyeball the numbers and actually read the submitted forms but when the AMT hit, it became impossible to manually reconcile the numbers. I quickly looked at most of the worksheets generated by the software but still did not exactly how it did the calculations.

I also have realized that the software might not be handling the previous state tax refund correctly as I read on the internet. Again the same issue i.e. it gets added straight to AGI but I am not sure if somewhere along the tax calculations, software prorates it or not. Unfortunately, there is no way that can handle this by hand so I have to trust the software to do the right thing.

What I did is to use the tax table on my (AGI-DEDS-EXEMPS) number and compare that to the tax calculated on the form. The computed tax is slightly less than the number via table. So it should be OK.

 

[Danh]

If you are using TurboTax, you have an option to print returns and all key worksheets. One of these worksheets is for AMT and it displays how total tax, including capital gains, is calculated. For most AMT victims, it should show your tax includes 15% of LT capital gains and dividend income plus 26 or 28% (depending on income) of your other income absent deductions.

AMT is affecting more and more taxpayers and it is truly complex and difficult for almost every taxpayer to understand. You're not the only one scratching his or her head on this subject.

 

[Drew99GT]

Originally Posted By: Vikas
I know it is 15% but for the life of me, I can't figure out how the calculations are done by the software. As far as I can see, the capital gains, dividends, distributions etc are all added to the income to come up with AGI. Once the calculations go in to AMT, I lose the trail of it altogether. I see no calculations of the type "multiply line yy by .15" on the Schedule D.

My question:- Which line does the capital gains split out of AGI again? Otherwise as far as I can see, I am getting taxed at my marginal tax rate on the capital gains. The only two subtractions that I see on my 1040 entries are for itemized (or standard) deduction and exemptions. That's it. I hope I am wrong!

I know what IRS publication says but please show me using 1040 and Schedule D as to how it actually accomplishes that.

Am I going senile in my old age or what???

============================================================
Capital gains and deductible capital losses are reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, and on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets. If you have a net capital gain, that gain may be taxed at a lower tax rate than your ordinary income tax rates. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. Some or all net capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. However, beginning in 2013, a new 20% rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the new 39.6% ordinary tax rate ($400,000 for single; $450,000 for married filing jointly or qualifying widow(er); $425,000 for head of household, and $225,000 for married filing separately). For more information, refer to Publication 505, Tax Withholding and Estimated Tax.
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The US tax code will make the youngest of whipper snappers senile. This form nets out differences for net long term cap gains and qualified dividends:

http://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf

It's a bit complicated but if you look it over for about a day and a half, it will make sense. Basically any differences between how line 44 of your 1040 is calculated normally and what should be subtracted due to the lower tax rates for long term cap gains and qualified dividends is done on that worksheet.

 

[threeputtpar]

Drew nailed it. The worksheet will first calculate your tax due based on all of your income at the normal tax rates. It does this to determine the top tax rate bracket you are in, as it needs to know this because that matters when it chooses 5% or 15% for LT capital gains.

Then it will back out LT capital gains and calculate the tax on them along with any other capital gains or losses and add that to your ordinary income tax amount.

Then it tells you to enter the smaller of the two numbers in line 44 and that is your tax amount.

Obligitory tax accountant mantra: May all of your gains be capital and all of your losses be ordinary.

 

[Vikas]

As a tax accountant, do you trust the personal tax software? I hope HRBlock tests their stuff extensively and has no programming errors. Unfortunately, I can no longer take a calculator and follow the tax computation instruction from the printed IRS booklet. Hopefully, crowd testing has done its job

 

[Drew99GT]

As far as basic computations, yes, tax software will most always be spot on. Problems arise from user input or for quirky, complicated, specific situations that arise for tiny fractions of the population.

 

[Vikas]

Without AMT, it is possible to check the software numbers. Once the AMT kicks it, it is pretty much impossible to follow the trail of the numbers.

Another question:- How in the world am I going to be able to find and provide proof for cost of my stocks which were purchased as ESPP plan (and few as incentive ISO and few more as grants) about 30+ years ago and the company got bought out many years ago and has already gone through at least three ownership changes. The brokerage house says they have no cost basis. When I call the current company, the CSR there was not even born when these merger and acquisition transactions took place! I know I did lot of paper work after first accusation and most likely have copy of my own calculations.

If only I had know about Vanguard at that time! My life would have been so simple and my nest egg would have been way more than what it is now. I could have taken everything and rolled it in to an index fund at that time and continued to put money there rather than keeping that stock and putting extra money in to bunch of "last years stellar funds".

If you are still young be smart and learn about Vanguard now and don't end up like me :-(

 

[99Saturn]

Originally Posted By: Vikas
Another question:- How in the world am I going to be able to find and provide proof for cost of my stocks which were purchased as ESPP plan (and few as incentive ISO and few more as grants) about 30+ years ago and the company got bought out many years ago and has already gone through at least three ownership changes. The brokerage house says they have no cost basis. When I call the current company, the CSR there was not even born when these merger and acquisition transactions took place! I know I did lot of paper work after first accusation and most likely have copy of my own calculations.

Good luck. I was just having a similar conversation yesterday regarding purchases via a DRIP from 20-30 years ago.

From a selfish perspective I'm glad that it is now required of the brokerage houses to report a number for securities acquired today.

 

[threeputtpar]

Originally Posted By: Vikas
As a tax accountant, do you trust the personal tax software? I hope HRBlock tests their stuff extensively and has no programming errors. Unfortunately, I can no longer take a calculator and follow the tax computation instruction from the printed IRS booklet. Hopefully, crowd testing has done its job


I'm not a tax accountant anymore, but during college I did work at Block and used their software. I continued using the home editions after I graduated and I have never found there to be any computational errors.