I think I have a fundamental mis-understanding of AGI and taxable income. I keep reading that AGI includes wages, dividends, interest income and “capital gains”. Do they really mean “Short-term capital gains”? Does long-term capital gains factor into AGI and taxable income? In another word: does the cap gains from the sale of a home change my income tax bracket? Example: If in one year, I have $0 wages, $40K dividend income, $10K deductions, and $400K long-term cap gains from the sale of a home (after the $250K exemption), will my taxable income be $40-10=$30K? If so, does that mean I will be in the 12% income tax bracket and essentially pay $0 on the $400K cap gains? I appreciate any thoughts and knowledge that you guys have on this topic. Thank you!
Take a look at a 1040. Below AGI you have to calculate tax on Dividends and Capital Gains (11a). See the Worksheet from IRS. LT capital gains for most will be 15% tax rate.
Earned income and dividends/cap gains have separate brackets. In your example, most of your income would fall into the 15% bracket for long term cap gains. If the dividends aren't qualified dividends, then they'd be taxed like interest/earned income and also be counted towards the LT cap gains progression.
Thanks! So for the $30k ordinary income I’ll be in the 12% bracket but for the $400k cap gains, I’ll pay 15%
Sort of... If you're married filing jointly, the first ~78k of LT gains are actually tax free, but the 40k other income would eat part of that. So you'd pay 15% on 400 -78+40 = 362k, plus whatever tax you pay for the 40k (marginal tax bracket isn't really that useful here).
You made a profit of 650k on the sale of your home?
Bought in 2004 for $500k. Current market value is $1.3M. With improvements, gain is about $650K.
Damn, congrats. Found this on Google and seems to answer your question. "From 2018, long-term capital Gains (LTCG) are taxed at 0%, 15% or 20% depending on your tax brackets. For the purpose of determining your LTCG tax rate, LTCG are added to your ordinary income. Your tax bracket for your ordinary income depends only on your ordinary income. Your LTCG will not push you to a higher bracket. In your example above, if you are married filing jointly, at $96,000 of taxable ordinary income, your tax bracket will be 22%. If you had $100,000 of LTCG, it will bring your total taxable income to $196,000 to determine your LTCG tax rate which will be 15%. But your ordinary income tax bracket will still be 22%, and not pushed up to 24%."