very low tax on high income from dividends

[nytcpa2012]

Only $800 tax on taxable income of $85k.  Almost all from dividends ($79.6k). I've never come across such a surprising result and went over the "Qualified Dividends and Capital Gain Tax Worksheet" to see how the calculation works.  Line 3 asks if filing Schedule D, which is a "yes".  Both lines 15 and 16 on D were negative numbers (96k and 13k negative, respectively) so line 3 goes in at -0- in the software.  

Line 9 comes up with close to $78k as taxed at zero!  what's left is taxed at a total of $798 (using a combination of the worksheet and the tax tables). 

Line 24 used the tax table to figure $9,940 tax on the $85k figure but didn't add it to the total tax due, since line says to enter the SMALLER of line 23 or line 24 for the "tax on all taxable income"! 

This just doesn't seem logical to me.....how can close to $78k in dividends be zero taxable? 

Can someone explain how this happens?  Does it have something to do with the Schedule D figures?

[itonewbie]

Sounds right.  Your answer is in §1(h)(B).

The threshold for 25% for MFJ back in 2016 was $75,300 and that is indexed to $83,350 this year.  That's why your client's qualified dividends are taxed at 0%.

(h) Maximum capital gains rate

(1) In generalIf a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—

(A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—

(i)

taxable income reduced by the net capital gain; or

(ii) the lesser of—

(I)

the amount of taxable income taxed at a rate below 25 percent; or

(II)

taxable income reduced by the adjusted net capital gain;

(B) 0 percent of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—

(i)

the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 25 percent, over

(ii)

the taxable income reduced by the adjusted net capital gain;

[TaxGuyBill · Accepted solution]

"Qualified Dividends" are taxed like long-term capital gains.

If the taxpayer's 'regular' tax bracket is less than the 22% bracket, it is taxed at 0%.  If the taxpayer's 'regular' tax bracket is 22% or higher, it is taxed at 15% (or 20% if they are in the highest tax bracket).

It sounds like most of the income falls within the 'regular' tax bracket of less than 22%, so it is taxed at 0%.

[nytcpa2012]

thanks for explaining it the easy way....😎

[itonewbie]

@TaxGuyBill.  TCJA did not modify §1 to realign the cap gain provisions to the new brackets.  References to the old tax rates remain and those thresholds continue to be indexed each year for inflation.  That's why the threshold for 0% cap gain is NOT the same as that of 22% for ordinary income.

[TaxGuyBill]

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@itonewbie wrote:

@TaxGuyBill.  TCJA did not modify §1 to realign the cap gain provisions to the new brackets.  References to the old tax rates remain and those thresholds continue to be indexed each year for inflation.  That's why the threshold for 0% cap gain is NOT the same as that of 22% for ordinary income.

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Thanks for the correction.  I forgot about that.  When I read your citation of the Code, that was inkling in the back of my mind, but I failed to state it correctly in my post.

[itonewbie]

NP, @TaxGuyBill. Just want to make sure the OP doesn't walk away with the wrong idea. 🙂