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Tax calculation on long-term capital gain and qualified dividends

Long term (held more than 12 months) capital gains from mutual funds and equities sales and qualified dividends from mutual funds and equities are taxed lower than ordinary income. For the year 2016, the long-term capital gain tax rates start at 0% for 10% and 15% brackets, 15% for 25%, 28%, 33% and 35% brackets and 20% for 39.6% bracket.

Example 1.

John, filing status single, earned $48000.0 in 2016. Assume that he has no other income, his AGI is $48000.0.

Taxable income = 48000.0 - 6300.0 - 4050.0 [AGI - Standard Deduction - Exemption] = $37650.0

John's taxable income is $37650.0 and he is in 15% tax bracket

Tax = 9275.*0.1 + (37650.0 - 9275) * 0.15 [First $9275 is taxed 10% rate and remaining is taxed 15% rate] = $5183.75

Example 2.

Let us assume that besides $48000.0 salary, John has $1000.0 long term capital gain from his stock fund sale, his AGI is $49000.0 [Wage + Capital gain].

Taxable income = 49000.0 - 6300.0 - 4050.0 [AGI - Standard Deduction - Exemption] = $38650.0

John's taxable income is $38650.0 and he is in 25% tax bracket

In the taxable income $38650.0, the amount $37650.0 is taxed as ordinary income and $1000.0 is taxed favorable long term capital gain rate.

Tax for $37650.0 = 9275.*0.1 + (37650.0 - 9275) * 0.15 [First $9275 is taxed 10% rate and remaining is taxed 15% rate] = $5183.75

Tax for $1000.0 capital gain = 1000 * 0.15 [Capital gain taxed at 15% rate for 25% tax bracket] = $150.0

Total tax = 5183.75 + 150.0 = $5333.75

Example 3.

Let us assume that John has $47000.0 salary, he has $1000.0 long term capital gain from his stock fund sale, his AGI is $48000.0 [Wage + Capital gain].

Taxable income = 48000.0 - 6300.0 - 4050.0 [AGI - Standard Deduction - Exemption] = $37650.0

John's taxable income is $37650.0 and he is in 15% tax bracket

In the taxable income $37650.0, the amount $36650.0 is taxed as ordinary income.

Tax for $36650.0 = 9275.*0.1 + (36650.0 - 9275) * 0.15 [First $9275 is taxed 10% rate and remaining is taxed 15% rate] = $5033.75

Tax for $1000.0 capital gain is 0 since long term capital gain is taxed at 0% for 15% tax bracket.

Total tax $5033.75


Example 4.

Let us assume that John has $47000.0 salary, he has $2000.0 long term capital gain from his stock fund sale, his AGI is $49000.0 [Wage + Capital gain].

Taxable income = 49000.0 - 6300.0 - 4050.0 [AGI - Standard Deduction - Exemption] = $38650.0

John's taxable income is $38650.0 and he is in 25% tax bracket

In the taxable income $38650.0 is result of John's wages and $2000 long term capital gain. The amount $36650 [Taxable income - long term capital gain] is taxed as ordinary income.

Tax for $36650 = 9275.*0.1 + (36650.0 - 9275) * 0.15 [First $9275 is taxed 10% rate and remaining is taxed 15% rate] = $5033.75.

Here is how the long term gain $2000 is taxed. The first $1000 of the long term gain $2000 is taxed 0%. Why ? Because $36650 + $1000 is $37650, in 15% tax bracket and long term capital gain is taxed 0% rate for 15% tax bracket. The remaining $1000 of the long term gain $2000 is taxed 15% rate($36650 + $1000 + $1000 is $38650, in 25% tax bracket; Capital gains at 25% tax bracket are taxed at 15% rate).

So, tax for $2000 Capital gain = 1000 * 0.0 + 1000 * 0.15 = $150.0

Total tax = 5033.75 + 150.0 = $5183.75

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