Question

During the current year, Ron and Anne sold the following assets: (Use the dividends and capital gains tax rates and tax rate schedules.)

Capital Asset	Market Value		Tax Basis		Holding Period
L stock	$	54,600	$	43,300	> 1 year
M stock		32,600		41,300	> 1 year
N stock		34,600		24,300	< 1 year
O stock		30,600		35,300	< 1 year
Antiques		11,600		6,300	> 1 year
Rental home		304,600*		92,300	> 1 year

*$30,000 of the gain is 25 percent gain (from accumulated depreciation on the property).

Ignore the Net Investment Income Tax.

a. Given that Ron and Anne have taxable income of only $24,600 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2018 assuming they file a joint return? (Round all your intermediate computations to the nearest whole dollar amount.)

Answer 1

Solution:
Computation of gross tax liability for the year 2018
Before we start calculation of tax liability first of all we have to calculate gross ordinary taxable income which include short term capital gain. In this problem short term capital gain is N stock and O stock of which holding period is less than 1 year. Hence ordinary taxable income is
Ordinary income before considering assets sold	$24,600
income from N stock ($34,600 - $24,300)	$10,300
income from O stock ($30,600 - $35,300)	-$4,700
Total ordinary taxable income	$30,200
	Amount($)	Amount($)
Tax on ordinary income:
On first $ 19,050 @ 10%	1,905
On balance $ 5,550 ($30,200-$19,050) @ 12%	1,338	3,243
Tax on long term capital gain:
Calculation of long term capital gain
L stock (54,600 -43,300)	11,300
M stock (32,600 - 41,300)	-8,700
Antiques (11,600 - 6,300)	5,300
Rental home (304,600 - 92,300 - 30,000)	182,300
Total long term capital gain	190,200
Long term capital gain tax @ 15% on $ 112,800 (190,200-77,400)		16,920
Depreciation recapture tax @ 25% on $30,000		7,500