Capital Gains Tax Question?

Question

I have read that in 2008 the capital gains tax will be 0% for those in the 15% tax bracket (about $63700 AGI)
If true, how will the IRS treat a combination of capital gains and earned and unearned income.
For example
sold stock with a cap gains of $63700
additional income $40000
will first $63700 from cap gains be considered first?, therefore $0 tax and then the $40000 considered in the 25% bracket?

Answer 1

When you have capital gains, then schedule D is used to figure your tax. But basically, tax on your other income is figured first, then the tax on the capital gains added on.

But to determine whether your capital gains rate is 5% (or zero for tax year 2008, unless congress changes that by the time 2008 returns are filed in early 2009) or 15%, your bracket is determined by the TOTAL income - in your example, that would be over $100K so over the 15% bracket, so you wouldn't get the zero rate.

Answer 2

I experimented with TurboTax on this topic earlier this year. The other income is counted first. Then the long term capital gains were taxed at the 5%, until the total of LTCG and other income hit the upper limit for the 15% bracket. The rest of the LTCG was taxed at the next higher rate.