Capital Gains

[antelopedundee]

From the 2017 Tax Cut and Jobs Act, for 2023 capital gains will not be taxed if your Federal taxable income is less than $44,625. If that applies to you should you just simply not include it in your return as income since your tax will be re-figured without it if you include it? Also if you are drawing Social Security leaving it in means that your taxable amount of SS could be larger because capital gains are included in calculating how much of your SS is taxable. Seems like kind of a backdoor way of taxing more of your SS than you would by leaving it out. If you have say $15K in capital gains it could mean the difference between having half of your SS taxed or having 85% of it taxed? What's the likelihood of your return getting flagged if matching up 1099s to your return says that you omitted income? First time I've seen that referred to as a negligence penalty.
Thoughts?

 

[Triggw]

Not a CPA, but there's bound to be a worksheet that has you report it then figure the tax, which could turn out to be zero. If it's something like stock or property sale, the 1099 won't report the cost basis, so you have to have a way to figure and report the actual gains, not just the sale amount.

 

[npaden]

https://www.irs.gov/pub/irs-pdf/i1040sd.pdf

Page 16 is the worksheet.

 

[antelopedundee]

This applies solely to those filers who have both capital gains and Social Security income. For simplicity I will limit cap gains to those for stock sales as reported on the 1099-B that you get from your brokerage house.

You use the the worksheet to subtract out the the tax due to capital gains IF you include capital gains as income on 1040 line 7. Up to a certain level capital gains are TAX EXEMPT. The Fed taxes Social Security. How much is taxed depends upon how much income you report including that on line 7. If you include capital gains in the formula for calculating taxable SS you result in more taxable income and by default higher taxes, thereby partially negating the tax exemption allowed for capital gains. So if you had say $20,000 in cap gains are you better off not to report it on 1040 line 7? Why would you use tax exempt income to increase your tax liability?

 

[antelopedundee]

Not a CPA, but there's bound to be a worksheet that has you report it then figure the tax, which could turn out to be zero. If it's something like stock or property sale, the 1099 won't report the cost basis, so you have to have a way to figure and report the actual gains, not just the sale amount.

The 1099-B should and does report both gross proceeds and cost basis for any stocks that you trade and have made a profit or loss.

 

[westbranch]

This applies solely to those filers who have both capital gains and Social Security income. For simplicity I will limit cap gains to those for stock sales as reported on the 1099-B that you get from your brokerage house.

You use the the worksheet to subtract out the the tax due to capital gains IF you include capital gains as income on 1040 line 7. Up to a certain level capital gains are TAX EXEMPT. The Fed taxes Social Security. How much is taxed depends upon how much income you report including that on line 7. If you include capital gains in the formula for calculating taxable SS you result in more taxable income and by default higher taxes, thereby partially negating the tax exemption allowed for capital gains. So if you had say $20,000 in cap gains are you better off not to report it on 1040 line 7? Why would you use tax exempt income to increase your tax liability?

It is not tax exempt, the tax rate is 0% up to a threshold. Big difference. For example, Roth IRA is tax exempt and will not impact taxable social security. Or capital gains from QSB stock. If you do not report the capital gains and if it is from a 1099B it will get caught by the automated system.

 

[antelopedundee]

When you Google tax exempt capital gains you get

""For example, in 2023, individual filers won't pay any capital gains tax if their total taxable income is $44,625 or below. However, they'll pay 15 percent on capital gains if their income is $44,626 to $492,300. Above that income level, the rate jumps to 20 percent.""

I know the exemption term applies to sale of a residence.

For all intents and purposes it is depending upon your income. Probably better to call it un-taxed. Still if it isn't taxed, but causes taxable SS to be increased and therefore giving you a higher tax obligation it seems to defeat the purpose of not taxing cap gains in the first place. I file through one of the free file services and I always rough out my taxes first to see where I stand. I don't know if those services use cap gains to determine taxable SS or not. I don't have squat for cap gains to report from 2023 so no biggie.

FWIW a few years back when I first used TurboTax I neglected to include some pension income on the Federal form which carried over to the state return. Thus far neither one has caught the error. I was advised by an accountant friend to let it slide unless they caught it, since it wan't a lot of money. He also said that the IRS doesn't match returns with 1099s until August or later. Maybe someone can confirm that.