Why capital gain reduce tax liability

[dbtaxsolutions]

Scenario:  W2 income is $35 256.00, Interest income $2529 - 12 000 MFS standard deduction = taxable income 25 785 with tax liability of $2 903.

Scenario: Same w2, interest income, + capital gain line 6 of $13 240 = taxable income of $ 39 025 after 12 k deduction, the tax liability is $2 139.00?

Can someone please help me understand why an additional $13 240 of capital gain

reduced the tax liability? I would think there would be more since there is higher taxable income. I understand the different long term capital gain tax rate, but since w2 has not changed, even if capital gain tax is zero, shouldn't the tax liability be the same at $2903?

Thank you in advance.

[George4Tacks · Accepted solution]

For the 2nd scenario, I get a tax of 2,967. You have some other item in this mix. The answer to your query is that the extra capital gain is very lightly taxed compared to the other income. 

[dbtaxsolutions]

hmmm. proseries produced a $2139. I find that depending on the box marked on the tax table smart worksheet, affects the over all tax liability. My additional question is, does the software just pre selects what box (1 tax table, 3 Sch D capital gain tax table, or 4 capital gain worksheet) and applies it to all income, capital gain and ordinary income? i have looked at all the forms related to this transaction and i cannot see the tax table used to determine how they came up with varying tax liabilities? thank you

[TaxGuyBill]

I use ProSeries and I'm getting $2967 like George did, when using $2529 of regular long-term capital gain.

You didn't add any withholding, payments or anything else to the second scenario, did you?

Where do you see the "tax table smart worksheet"?  Yes the program uses the method and table that is appropriate, based on the IRS instructions.

If you click the "Find Form" button (or hit Control-F), type "SC" and it will bring you to the Schedule D Tax Worksheet.

[itonewbie]

I'm with George.  Did that offline and online and got the same number.

[dbtaxsolutions]

Too bad i can't post a photo of the return. The tax table smart worksheet is on 1040  in the software (not on print out).  The 13 240 comes from Capital gain of 24 513 - 11 273 rental real state suspended loses (final year). The capital gain comes from a qualified homesale that was depreciated for 2.5 years as a rental and un recaptured section 1250 gain of $4378. The prior CPA used a much lower basis for depreciation on the rental asset so that linking the homesale to rental asset disposal creates a capital gain when in fact the owner bought it for 143000 and sold it for 140 000.  The Cpa depreciated it at the basis of 58 930 starting in 2015, so when i did the sale and appropriate the sale portion of the bldg, it came up to 115 173 creating that huge capital gain (but outside of that, it's actually a loss). Doing that created the 2139 tax liability. When i found out, it was actually a loss, i disregarded the basis that was used, did not link the home sale and just did qualified home sale, that's when i got the $2903 result, which was higher for some reason. Thank you everyone, i am just trying to make sense of this worksheet. I don't actually see a capital gains tax table, do you?

[itonewbie]

Wow, I haven't read through this but it has a whole lot more information than what you provided in the initial question and follow-up comments.  Would have been helpful if you included all the details upfront.

[TaxGuyBill]

"The 13 240 comes from Capital gain of 24 513 - 11 273 rental real state suspended loses (final year)"

I think that is what you are missing.  The suspended losses are ORDINARY, and offset the W-2 income.  Then you have $24,513 of capital gain.

[dbtaxsolutions]

In Schedule 1 shows this adjustment to income, line 13 cap gain 24 513 - 11273, line 22 gives 13 240, which then goes to line 6 of 1040 increasing taxable income. These are in the return that produced a lower tax bill with capital gain, why i am trying to get at is why with 13 240 capital gain, it was giving me $2139 tax, if i take it out, it's $2903. In the tax smart worksheet, with capital gain, it selects the capital gain tax table, without it, it selects the first box of tax table. I see what the software is doing, but i wanted to see the behind the scene how these tax figures came about.. I have played with this return over and over and still getting the same result. sorry, i am missing something for sure, just don't know what. thank you.

[dbtaxsolutions]

I would be happy to email the two version, if anyone is interested in looking at it. I just don't know how to explain to a client how his liability is higher without the capital gain (?) assuming the numbers /results produced was correct. Thank you.

[TaxGuyBill]

I'm curious to figure out what is going on.  If you want to send me a "sanitized" copy of them (no private information), I'll see what I can figure out.

[dbtaxsolutions]

Sent it Bill, thank you so much and thank you everybody, i know it's crunch time. I sure appreciate it.