The Tax Report breaks out marginal bracket information for both ordinary income and long-term capital gains and qualified dividends
Ordinary Income
Holistiplan will calculate the amount of taxable income that is considered ordinary income (e.g., wages, taxable Social Security, IRA withdrawals, interest, ordinary dividends, short-term capital gains, etc.). Ordinary income is taxed using the marginal rate structure, where progressively larger amounts of income are taxed at higher and higher rates.
In this case Robert and Roxanne had $70,800 of ordinary income, which puts them in the 12% bracket. Many people assume that their marginal bracket is equal to the tax rate on all of their income, which is not the case. Instead, that is the rate at which all the ordinary income in that 12% bracket ($23,200 to $94,300 in 2024) is taxed. But they paid taxes at the 10% rate as well on the dollars in the prior marginal bracket as well.
Qualified Dividends and Long-Term Capital Gains
Qualified dividends and long-term capital gains enjoy preferential tax treatment, with rates of 0%, 15%, and 20%. This type of income will always be taxed at lower rates than ordinary income. We intentionally separate this type of income from ordinary income to highlight this concept.
Robert and Roxanne had $50,000 of qualified income (long-term capital gains (LTCG) and qualified dividends), which was taxed at both the 0% and 15% rates. The LTCG brackets, like the marginal brackets on ordinary income, are progressive, and you can have income taxed at multiple LTCG rates.
Lower income taxpayers may enjoy an even cheaper rate for long-term capital gains and qualified dividends. Any amount of taxable income up to about the threshold for the 12% marginal bracket that is made up of qualified dividends and long-term capital gains is taxed at 0%. Once that threshold has been reached, the rate increases to 15% for the next dollar of qualified dividends or long-term capital gains, followed by a 20% rate at a significantly higher amount of income.
Holistiplan indicates the amount of “qualified income”, while also showing how much of that income is taxed at each marginal rate. This way, you can show your client if any of this income was taxed at 0%, which is often hidden within the larger tax return.
If your client is subject to additional Medicare taxes, we’ll show that information, too, along with any Additional Medicare Tax (Form 8959) and Net Investment Income Tax (NIIT).