Question

You are in the 33% marginal tax rate. The stock you purchased at the beginning of the year has increased in value by $27,000.

a. If you sell the stock today, your capital gain will be classified as short-term. At what rate would you be taxed, and what would be your tax liability?

Tax rate %

Tax liability $8910

b. If you waited a month, your capital gain would be classified as long-term. At what rate would you be taxed, and what would be your tax liability given this scenario?

Tax rate %

Tax liability $

c. You earned a salary of $179,000, had interest income of $600, and dividend income of $600, and you experienced the short-term capital gain described in 4(a). What is your gross income?

Gross income $

d. You made a traditional IRA contribution of $2,000 and paid $500 in student loan interest. What is your adjusted gross income (AGI) based on the gross income described in 4(c)?

AGI $

Answer 1

A. Short term capital gain

In case you hold your assets for less than one year, you will be charged at normal rate of tax i.e, marginal tax rate applies.

Tax rate will be 33%

Tax Liability will be $8910

B. Long-term capital gains

If you can manage to hold your assets for longer than a year, you can benefit from a reduced tax rate on your profits. For 2018, the 0% long-term capital gains tax rate applies to individuals in the two lowest (10% and 15%) marginal tax brackets. A 15% long-term capital gains tax rate applies to the next four brackets -- 25%, 28%, 33%, and 35%. Finally, a 20% long-term capital gains tax rate applies to taxpayers in the highest (39.6%) tax bracket.

So, Tax Rate will be 15%

Tax Liability will be $4050.

C. Calculation of Gross Income

Gross income is total of income from all sources i.e, $179000 + $600 +$600 + $27000

i.e, $207200

D. Adjusted Gross Income (AGI) is total gross income - allowances for personal exemptions and deduction.

Contribution to traditional IRA is qualified as deduction for AGI

So, AGI = $207200 - $2000 - $500

i.e, $204700