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The question applies to the US federal income tax for tax year 2018.

To make things concrete, let's suppose I have $50k in ordinary income and $50k in long term capital gains. I plan to use the standard deduction of $12k for a single person.

How would the standard deduction be applied in this situation?

To clarify: If there were a single tax rate applied to all sources of income there'd be no problem. But different tax rates apply to ordinary income and to LT capital gains. Given that this is the case it is essential to know how the standard deduction is allocated. In the example, does it reduce ordinary income by $12k; or does it reduce ordinary income by $6k and LT capital gains by $6k; or does it reduce LT capital gains by $12k; or...?

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In the case where your ordinary income is greater than your deductions, the standard deduction will be applied to your ordinary income.

Using your example, where you have $50k of ordinary income, $50k of long-term capital gains, and a standard deduction of $12k, you would be taxed on $38k of ordinary income and $50k of long-term capital gains.

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Long term capital gains are taxed are zero, 15 percent and 20 percent, depending on your income.

The standard deduction isn't divided between ordinary income and long term capital gains. Along with other possible deductions, the $12k standard deduction is subtracted from your total income and then you look up the tax due in the Schedule.

  • But the tax schedule does not account for the special rate for income tax on capital gains; it simply says things like "if your income is between $X and $Y, your income tax is $Z plus 25% of (income minus $X). – Dilip Sarwate Nov 5 '18 at 4:30
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    @DilipSarwate If you think of income and capital gains as separate things, your quoted sentence becomes less confusing. – Hart CO Nov 5 '18 at 4:44

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