Question

If Isabella Rodriguez is single and in the 35 percent tax bracket, calculate the tax associated with each of the following transactions. (Hint: Use the IRS regulations for capital gains in effect in 2018.) Treat each of the following cases as independent of the others. Tax savings should be preceded by a "-" sign. Round the answers to the nearest cent. She sold stock for $3,930 that she purchased for $3,000 4 months earlier. $ _____ She sold bonds for $4,500 that she purchased for $3,500 3 years earlier. $ _____ She sold stock for $2,700 that she purchased for $3,000 23 months earlier. Assume this to be the only Stock in Isabella's portfolio. $ _____

Answer 1

Capital gains are bifurcated as short-term and long-term capital gain. short-term capital gains are gains from holding the asset for less than or equal to 12 months. long-term capital gains are gains from holding the asset for more than12 months.

Short-term capital gains are taxed as ordinary income and normal tax rate applies which is 35% in this case. Long-term capital gains are taxed at lower rate which was 15% for a single taxpayer falling in 35% tax bracket in 2018.

a. Stock was held for less than 4 months. so short-term capital gain will be treated as ordinary income and normal tax rate will be applicable.

tax amount = (Selling price - purchase price)*tax rate = ($3,930 - $3,000)*35% = $930*35% = $325.50

b. Bonds were held for more than 12 months. so, it's long-term capital gain and 15% lower tax rate will be applicable.

tax amount = (Selling price - purchase price)*tax rate = ($4,500 - $3,500)*15% = $1,000*15% = $150.00

c. Stock was held for more than 12 months. so, it's long-term capital loss and 15% lower tax rate will be applicable.

tax saving = (Selling price - purchase price)*tax rate = ($2,700 - $3,000)*15% = -$300*15% = -$45.00