Question

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Mr. and Mrs. HenryHenry file a joint return and have taxable income of $ 380,000 without...

Mr. and Mrs. HenryHenry file a joint return and have taxable income of $ 380,000 without considering the following independent fact situations.

a.

 They have a STCG of $ 31,000 and a LTCL of $ 20,000

b.

 They have a LTCG of $24,000 due to the sale of a collectible and a LTCG of $12,500
due to the sale of General Motors stock.

c.

 Same as Part b except they also have a STCL of $4,500.

Requirement

Determine the increase in their tax liability for each independent fact situation.

Solutions

Expert Solution

Tax liability of Mr & Mrs Henry without capital gains

Taxable income = $380,000

Tax on income

$0-$19050 @10% = 19050 *10% = $1,905

$19051 - $77,400 @ 12% = 58350*12%= $7,002

$77401 - $165,000 @ 22% = 87600+22% = $19,272

$165,001 - $315,000 @ 24% = 150,000*24% = $36,000

$315,001 - $380,000 @32% = 65000 *32% = $20,800

Total Tax Liabilty =1905+7002+19272+36000+20800 =$84,979

a. In USA individuals or Companies pay US federation, CGT on net capital gains i.e., if there are gains and losses in the same year the losses are offset with gains and the net gains are taxed. If there is a loss after offset then it is allowed to deduct from other income. in the given scenario

STCG = $31,000

LTCL = ($20,000)

Net Gains = 31,000 - 20,000 =$11,000

The $11,000 net gains will arise from STCG. In USA STCG is taxed along with regular income therefore now the joint income now will be $380,000 + 11,000= $391,000

Tax Liability on $391,000 is

Tax liability of Mr & Mrs Henry without capital gains

Taxable income = $380,000

Tax on income

$0-$19050 @10% = 19050 *10% = $1,905

$19051 - $77,400 @ 12% = 58350*12%= $7,002

$77401 - $165,000 @ 22% = 87600*22% = $19,272

$165,001 - $315,000 @ 24% = 150,000*24% = $36,000

$315,001 - $391,000 @32% = 76000 *32% = $24,320

Total Tax Liability =1905+7002+19272+36000+24320 =$88,499

Increase in Tax liability = $88499- $84,979(calculated above) = $3,520

b. Tax on sale of collectables are taxed at 28% regardless of the income level of individual

LTCG on collectables = $24,000

Tax on LTCG due to collectables = $24,000*28%= $6720

LTCG has different tax rates

LTCG on sale of General Motors Stock = $12,500

Tax rate on LTCG from $0-$77,200 (married filing jointly) si 0%, so the tax liability on sale of stock is $0

Increase in Liablity =$6,720 ( tax on sale of collectables)

c All the above calculation for LTCG on sale of collectables is same tax on sale of collectables = $6,720

STCL of $4,500 is offset against LTCG of $12,500 net capital gains = 12,500-4,500 = $8,000

Tax on net LTCG = 8,000 *0% =$0

increase in tax liability = $6,720

Note: Tax rates and Tax slabs are for 2018-2019 year

ekkarill92 answered 1 year ago
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