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	$	52,200	$	42,100	> 1 year
M stock		30,200		40,100	> 1 year
N stock		32,200		23,100	< 1 year
O stock		28,200		34,100	< 1 year
Antiques		9,200		5,100	> 1 year
Rental home		302,200*		91,100	> 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 $22,200 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2020 assuming they file a joint return? (Round all your intermediate computations to the nearest whole dollar amount.)

b. Given that Ron and Anne have taxable income of $402,200 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2020 assuming they file a joint return? (Round all your intermediate computations to the nearest whole dollar amount.)

Answer 1

A) Gross tax liability for 2020

Ron and Anne’s ordinary income will increase from $22,200 to $25,400 due to their $3200 net short-term capital gain. Ron and Anne’s gross tax liability of $35,365 is computed as follows:

Income	Slab	Amount	Tax Rate	Tax liability	Explaination
Ordinary income	$0 to $ 19750	$19750	10%	$1975	The first $19,750 of Ron and Anne’s $25,400 of ordinary income is taxed at 10%
	$19,751 to $25,400	$5649	12%	$678	Ron and Anne’s remaining $6049of ordinary income (25,400 – 19,751) is taxed at 12%.
Long term gains	$20,500	$20,500	0%	$0	$20,500 ($80,000 - $25,400 ordinary income - $30,000 25% capital gain - $4,100, 28% capital gain) of 0/15/20% rate capital gain fits into the remaining space below the maximum zero rate amount ($80,000), so it is taxed at 0%.
		$190,800	15%	$28,620	$190,800× 15% All of the remaining $154,800 ($211300- $20,500) of 0/15/20% capital gain is taxed at 15% because Ron and Anne’s taxable income (including the gains) is above the maximum zero rate amount ($80,000) and the maximum 15-percent rate amount ($496600)
Un-recaptured gain		$30,000	12%	$3,600	The 25% gains are taxed at the lower of Ron and Anne’s marginal tax rate (12%) or 25%. In this case, the $30,000 of gains will be taxed at 12%.
Antiques		$4100	12%	$492	The 28% gains are taxed at the lower of Ron and Anne’s marginal tax rate (12%) or 28%. In this case, the $4,100 of gains will be taxed at 12%.
Total Tax liability				$35,365

B) Gross tax liability for 2020

Ron and Anne’s ordinary income will increase from $402,000 to $406100 due to their $4100 net short-term capital gain. Ron and Anne’s gross tax liability of $137,366 is computed as follows:

Income	slab	Amount	Tax rate	Tax liability	Explaination
Ordinary income	$0 to $19,750	$19,750	10%	$1975	The first $19,750 of Ron and Anne’s $406100 of ordinary income is taxed at 10%
	$19,751 to $80,250	$60,499	12%	$7260	The next $60,499 ($80250-19751) of Ron and Anne’s $406100 of ordinary income is taxed at 12%.
	$80,251 to $171,050	$90,800	22%	$19,976	The next $90,800 ($171,050-$80,251) of Ron and Anne’s $406100 of ordinary income is taxed at 22%.
	$171,051 to $326,600	$155,549	24%	$37,332	The next $155,549($326600-$171051) of Ron and Anne’s $401600 of ordinary income is taxed at 24%
	$326,601 to $401,600	$79,499	32%	$24,440	The remaining $86350 ($401600 - $326,601) of Ron and Anne’s $401600 ordinary income is taxed at 32%
90,500(0%,15%,20%) Rate Capital gain		$90,500	15%	$13,575	$90500 × 15% ($496600 - $406100 ordinary income) of 0/15/20% rate capital it is taxed at 15%.
120800(0,15,20%)rate capital gain.			20%	$24,160	120800× 20% All of the remaining $ ($211300 - $90500) of 0/15/20% capital gain is taxed at 20%
Un-recaptured gain	Not applicable	$30,000	25%	$7,500
Antiques	Not applicable	$4100	28%	$1,148
Total tax liability				$137,366

NOTES

Capital Asset and Capital Gain Tax

An asset are those assets which include property of any kind which is held by the assessee whether connected with business or profession or not connected with business or profession.If the capital assets are hold for more than one year then it is termed as long term capitals and if the capital assets are sold for less than one or exact one year is termed as short term capitals.

The income arises from the above sales would result long ters and short term capital gains.

In US federal Tax rates system. These two capital gains are taxed diffrently. IF the capital gain is for shot term then the tax brackets are comes under normal income tax brackets.

Ie. 10% - for 0 - $19750

12% for $19751 - $ 80250

22% for $80251 - $171050

24% for $171051 - $326,600

32% for $326,601 -$414,700

35% for $414,701 to $622,050

37% more than $622,051
That is, 0% for 0 to $80000And if the capital assets are long term then the tax brackets are as shown below if file jointly

15% for $80001 to $496600

20% for over $496600

Capital gains may be taxed at rates greater than20% in the following cases:

1).The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.

2).Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28%rate.

3).The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Capital gain losses can be set off with capital gains. Short term capital loss can be set off with short term and long term gains.

Calculaton of Net Taxable income of Ron and Anne are as follows

Capital Asset	Short term gain/loss	long term(28%)	long term(25%)	long term (0,15,20%)
L stock				$10,100
M stock				-$9,900
N stock	$9100
O stock	-$5900
Antiques		$4100
Rental gains				$211,100
Un-recaptured gains			$30,000
Total	$3,200	$4100	$30,000	$211300