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So What Am I Missing Here

Posted: Wed Mar 13, 2019 9:23 am
by moorso
Did my fathers taxes. He is filing joint return and turbo says he has $25,420 in taxable income when its all said and done. Had about $37,000 in capital gains but had a huge nursing home expense of over $80,000 which ultimately gave him that much in itemized deductions. His other income from dividends, ira withrdrawals and such gave him adjusted gross income of $105,000. So my question is, shouldnt he be taxed something on the $25,420 ? It is telling me his tax is zero....and I'm not understanding why. Any ideas?

Re: So What Am I Missing Here

Posted: Wed Mar 13, 2019 9:37 am
by marcopolo
moorso wrote:
Wed Mar 13, 2019 9:23 am
Did my fathers taxes. He is filing joint return and turbo says he has $25,420 in taxable income when its all said and done. Had about $37,000 in capital gains but had a huge nursing home expense of over $80,000 which ultimately gave him that much in itemized deductions. His other income from dividends, ira withrdrawals and such gave him adjusted gross income of $105,000. So my question is, shouldnt he be taxed something on the $25,420 ? It is telling me his tax is zero....and I'm not understanding why. Any ideas?
That sounds about right.

The deductions for medical expenses is wiping out all the ordinary income. The ~$25k of taxable income remaining is all likely due to (long term) capital gains and/or qualified dividends, which are taxed at 0% in that bracket.

Re: So What Am I Missing Here

Posted: Wed Mar 13, 2019 9:41 am
by cas
moorso wrote:
Wed Mar 13, 2019 9:23 am
Did my fathers taxes. He is filing joint return and turbo says he has $25,420 in taxable income when its all said and done. Had about $37,000 in capital gains but had a huge nursing home expense of over $80,000 which ultimately gave him that much in itemized deductions. His other income from dividends, ira withrdrawals and such gave him adjusted gross income of $105,000. So my question is, shouldnt he be taxed something on the $25,420 ? It is telling me his tax is zero....and I'm not understanding why. Any ideas?
Long Term Capital Gain and Qualified Dividend income "floats on top" of ordinary income. (See bar chart here: https://thefinancebuff.com/reset-cost-b ... gains.html . Scroll down to the actual bar chart.) Meanwhile, itemized deductions "drain" the ordinary income "out the bottom" of the bar chart. Looks like, in your father's case, all that is left by the time the Taxable Income line is reached is LTCG/QDiv income. LTCG/QDiv is taxed at the special 0% LTCG/QDiv tax rate for all Taxable Income below $77,200 for Married-Filing-Jointly in 2018.

So ... apply the 0% tax rate to $25,420 in Taxable Income (MFJ), and you get $0 for a total tax bill.

(Go into Turbo Tax, tell it to show you the (major) worksheets, then look at the Qualified Dividend and Capital Gains worksheet. That is where the IRS works out this concept where the LTCG/Qdiv "floats on top" of ordinary income. )

Re: So What Am I Missing Here

Posted: Wed Mar 13, 2019 2:55 pm
by megabad
moorso wrote:
Wed Mar 13, 2019 9:23 am
It is telling me his tax is zero....and I'm not understanding why. Any ideas?
Good posts above that likely apply to his situation. I got a chuckle from your post. I have never looked at my tax due and thought "my tax should be higher". Good on you for being vigilant though.

Re: So What Am I Missing Here

Posted: Thu Mar 14, 2019 7:17 am
by moorso
Thanks guys. I have a better understanding now ltcg get taxed or not taxed in this case.