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Federal income tax computation on Qualified dividend income

I use Turbotax to do my return; and I am somewhat confused about their calculation.

I'll use some illustrative numbers.

Taxable income (federal) = $60K QDI = $40K

Accordingly, Income @ ordinary rates = $20K (net after std/itemized deductions

As I understand it, for Single/Married filing separately taxpayers, the first $39,375 of QDI is taxed @ 0%, the other $725 will be taxed @ 15%; and the ordinary income taxed at the regular rates starting @ 10%.

But Turbatax computes the tax as follows:

  1. The amount of QDI @ 0% is ,375 (,375-20K net ordinary income); plus
  2. The amount of QDI @ 15% is ,625 (40,000-19,375); plus
  3. Ordinary income tax on K, starting @ 10% and up.

It appears from the above, only $19K+ of my QDI is taxed @ 0%

Is Turbox doing it correctly and I simply misunderstand the situation?

TIA

Reply to
Not A Clue
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TurboTax is doing it correctly. The tax brackets are not applied independently to ordinary income and to qualified dividends. The qualified dividends are "stacked" on top of the ordinary income to calculate the tax. So the ordinary income falls in the lowest brackets, and the qualified dividends get pushed up into the higher brackets, as you have observed.

If you had any long-term capital gain that would be treated the same as qualified dividends. The long-term capital gain and the qualified dividends would be added together and the tax would be calculated on the total. The total long-term capital gain and qualified dividends would be stacked on top of the ordinary income.

Bob Sandler

Reply to
Bob Sandler

The amount of QDI/LTCG income that is taxed a 0% is not necessarily $39,375, it is $39,375 less the amount of income taxable at ordinary income rates. It appears Turbotax is doing the calculation correctly.

Reply to
BignTall

So, if I have Net ordinary income of $40K+ and QDI of $20, my entire QDI would be taxed @ 15%? So the 0% rate for QDI/LTCG is only for taxpayers that have $0 Net ordinary income?

TIA

Reply to
Not A Clue

Sorry, I misworded in my previous reply. I meant to say that taxpayers that have any net ordinary income, they don't get the full benefit of 0% on QDI/LTCG.

TIA

Reply to
Not A Clue

Correct, assuming you are single or married filing separately, and "$40K+" isn't so large that it pushes the qualified dividends into the 20% bracket.

Correct.

To be clear, the calculation is based on *taxable* income (Form 1040 line 11b for 2019), not total income or AGI. Taxable income is AGI minus the standard deduction or itemized deductions and the QBI deduction, if any. I'm not really sure exactly what you mean by "net ordinary income," but in your first post it looks like you mean taxable income.

So if someone's total ordinary income, before subtracting deductions, is less than their deductions, they do get the full benefit of the 0% bracket for qualified dividends and long-term capital gains.

Bob Sandler

Reply to
Bob Sandler

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