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The tax rate for capital gains is 0% if your total taxable income is below $77,200 (if married filing jointly). But does "total taxable income" include capital gains, or not?

For example, suppose my other income sources total up to $70,000, and I also have $50,000 in capital gains. Which of the following descriptions is correct?

  • My total taxable income is less than $77,200, so the $50,000 in capital gains is untaxed.
  • My total taxable income is $120,000, which is above the $77,200 threshold, so I pay taxes on the capital gains.
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    Possible duplicate of How are long-term capital gains taxed if the gain pushes income into a new tax bracket?
    – Shorlan
    Commented Apr 11, 2019 at 21:26
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    @Shorlan — that question is from before the new 2018 tax law. The new law completely changes how taxes on capital gains are taxed.
    – Pete Becker
    Commented Apr 11, 2019 at 21:47
  • @PeteBecker: the only thing TCJA changes in this area is reducing the percentage rates on 'ordinary' (not long-gain or qual-div) income, thus slightly reducing the relative benefit for long-gain and qual-div. All other rules are the same. The bracket amounts change each year for inflation, but that was already true.
    – dave_thompson_085
    Commented Apr 12, 2019 at 14:05
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    @PeteBecker: I have not only looked at but done this computation for the past 12 years. Capgains tax is computed on the Qualified Dividend and Capital Gain Tax Worksheet (QDCGTW) in the 1040 instructions in most cases and the Schedule D Tax Worksheet in the schedule D instructions for some complex cases. Both of these for 2018 are line for line identical to 2017 and 2016 except the bracket amounts (in 8 and 15 or 15 and 24 respectively) and the line number references to 1040 because in 2018 1040 was rearranged but the references are still to the same data. ...
    – dave_thompson_085
    Commented Apr 14, 2019 at 0:05
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    ... There is thus NO DIFFERENCE except for the brackets, and the bracket change is not due to the 2018 (really Dec. 2017) law. Given your persistent refusal to give any specifics, I'm not going to waste my time digging the earlier years out of storage to confirm my knowledge that your claim is entirely wrong.
    – dave_thompson_085
    Commented Apr 14, 2019 at 0:08

2 Answers 2

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All of your long-term capital gains are included in your gross income. Once you take your deductions (itemized or standard), what’s left is “taxable income”. Then there’s a worksheet to figure out how much of your “taxable income” is actually taxable; that’s where you get the adjustment for your long term capital gains. So, yes, long term capital gains are part of the “taxable income” that is used to determine the rate you pay on those gains.

I just went through this in TurboTax. It showed a “taxable income” of a bit over $40k and no tax due. I had to dig through the additional papers to find that worksheet to see that the result was right, because most of my income was LTCG.

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  • I'm also using TurboTax -- can you help direct me to where I can find that worksheet?
    – mweiss
    Commented Apr 11, 2019 at 22:20
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    @mweiss — I’m away from home, so can’t give you details. I used their “print” menu and looked through the list of available forms. From the online documentation here it looks like its title is “Qualified Dividends and Capital Gain Tax Worksheet—Line 11a”.
    – Pete Becker
    Commented Apr 11, 2019 at 22:33
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As explained here, "total taxable income" includes all capital gains. But, not all of the capital gains are necessarily taxed.

In your example, the "first" $7,200 of your capital gains would not be taxed, because they would get your total income up to the $77,200 threshold where capital gains start to kick in. Only the remaining $42,800 would be subject to capital gains taxes.

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