Home › Fairmark Forum › Taxation of Investments › Confusion with Qualified Dividends and Cap Gain Tax Worksheet › Reply To: Confusion with Qualified Dividends and Cap Gain Tax Worksheet
No, you haven’t been shortchanging yourself. The worksheet produces the correct result when entries are made according to instructions, and there’s no reason to believe you’ve made an error, other than failing to understand a rule that is convoluted enough that almost anyone would find it confusing.
Where you went wrong was in assuming that because you had $20,126 on the line that gives the number taxed at zero percent, you must “have room for more.” At first blush this would seem to be true, because the dollar limit on the amount taxed at zero percent is greater than $20,126. For 2020 it’s $80,000 on a joint return, $53,600 for heads of household, and $40,000 for others.
However, this dollar limit applies to overall taxable income. In 2020, if you’re single and have ordinary income (the kind that does not qualify for special rates) of $19,847, then the maximum amount of qualified dividend or long-term capital gain that can be taxed at zero percent is $20,126. The ordinary income (such as wages, pensions and interest income) used up nearly half of the $40,000 dollar amount that is potentially subject to zero percent if all your income were CG and qualified dividends. This means that if you already have at least $20,126 in those categories, adding another $10,000 in qualified dividends won’t increase the amount taxed at zero percent, because you don’t actually have “room for more.”
The figures would change if we’re looking at a different year or a different filing status, but the concept remains the same. The amount of ordinary income on your return reduces the ceiling on the amount of CG or qualified dividend taxed at zero percent. If you’ve reached that lower ceiling, an increase in CG or qualified dividend won’t increase the amount taxed at zero percent.