Question

In: Finance

Cynthia has the following income: Purchased stock 6 months ago for $10,000 and sold it today...

Cynthia has the following income:

Purchased stock 6 months ago for $10,000 and sold it today for $20,000

Sells investment real estate received as a gift from her mother 2 years ago. Mother's basis was $300,000 and sold it for $325,000

Purchased car 3 years agao for $40,000 and sold it today for $30,000

Salary of $40,000

What is Cynthia's net capital gain and why? How much tax does she pay on all of her income? Assume no other income or deductions

Solutions

Expert Solution

Capital gains on selling stock = Selling price of stock - Purchase price = 20000 - 10000 = $ 10,000

Capital gain on real Estate = Sale price - basis of her mother (as she received it as gift, mother's basis become her basis) = 325000 - 300000 = $ 25,000

Capital gain on sale of car = sale price - purchase price = 30,000 - 40,000 = Loss of $ 10,000

Net Capital Gain = Capital gain on sale of stock and real estate - capital loss on sale of car = 10,000 + 25,000 - 10,000 = $ 25,000

She has a salary of 40,000 and a net capital gain of $ 25,000 on which she has to pay tax.

She will have to pay 15.57% effective tax on $ 40,000 (because we get standard deduction of $ 12000 on our salary of 40,000 which makes taxable income to be $ 28,000). First slab is that of 10% so 10% tax on $ 9525 has to be paid first, second tax bracket is 12% so out of 28000 we have paid tax on 9525 so now remaining is 18475 taxable amount, so 12% of 18475 = $2217 tax

Therefore total tax on 40,000 = 952.5 + 2217 = $ 3169.50

  • Starting with your gross income of $40,000, 6.2% of that is taken for Social Security costs, taking $2,480 from you.
  • 1.45% of your gross income is taken for your Medicare costs, taking $580 from you.
  • Your employer pays FICA tax, with is $3,060 (the addition of both your Social Security costs and your Medicare costs).
  • The total federal tax that you would pay is $6,229.50 (equal to your income tax, on top of your Medicare and Social Security costs).

With all this in mind, the total amount that you would take home is $33,770.50.

& $ 2394 on net capital gains (since total profit is more than tax allowance of $11700 for Year 2018-19, capital gains tax will have to be paid)


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