Erin, a single taxpayer, has a taxable income of $168,000 in the current year before considering...

Erin, a single taxpayer, has a taxable income of $168,000 in the current year before considering the following capital gains and losses:

Short-term capital gain	$ 3,000
Long-term capital gain	22,000
Unrecaptured Section 1250 gain	14,000

In addition, Erin has an $8,000 long-term capital loss carryover from last year. What are the effects of these transactions on Erin’s taxable income and her income tax liability?

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Expert Solution

Erin has a $3,000 short-term capital gain and a $28,000 long-term capital gain. The gains are added to her gross income, which increases her taxable income to $199000

Short term capital gain = $3000

Long term capital gain. = 22000

Unrecaptured section 1250 gain = 14000

Long term capital loss. = (8000)

Net long term capital gain . = 28000

The short term capital gain is taxed as ordinary income at Erin's 28% marginal tax rate. The 28% rate gain (i.e., the long-term capital loss carryover) is negative, so it reduces the unrecaptured Section 1250 gain to $6,000.

Short term capital gain . = 3000

Unrecaptured section 1250 gain = 14000 - 8000 = 6000

Adjusted net capital gain = 28000 - 6000. = 22000

Because Erin's marginal tax rate is greater than 25%, the $6,000 unrecaptured Section 1250 gain is taxed at the 25% maximum tax rate. The adjusted net capital gain, which is taxed at 15%, is $22,000. This results in an additional tax liability for Erin's capital gains of $5,640:

Tax on 3000 short term capital gain = $3000 × 28% . = $840

Tax on 6000 unrecaptured section 1250 gain = $6000×25% = $1500

Tax on 22000 adjusted net capital gain = $22000×15% . = $3300

Tax on $31000 capital gain income =$5640

Note: without the lower capital gains rates on the unrecaptured Section 1250 gain and the adjusted net capital gain, Erin would have paid $7,840 ($28,000 x 28% marginal tax rate) of tax on the income.

ekkarill92 answered 1 year ago

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