Question

Below is a table with four different scenarios for a taxpayer who opts to sell several different types of stock throughout the year. Assume that all ordinary income for the taxpayer is taxed at a flat tax rate of 22%. In contrast, his long-term capital gains tax rate is 15%. His only income outside the transactions with the stock is $100,000 or ordinary income from his salary.

	Scenario 1	Scenario 2	Scenario 3	Scenario 4
ST capital gain		$4,000	$4,000	$4,000
ST capital loss	$7,000		$7,000	$10,000
LT capital gain		$9,000	$9,000	$9,000
LT capital loss	$5,000		$5,000	$5,000

a. What is the total amount of taxes saved during the current year because of the capital losses in Scenario 1?

b. What is the additional amount of tax due the taxpayer must pay in total this year because of the capital gains in Scenario 2?

c. What is the total change in tax due for the taxpayer because of the gains and losses in Scenario 3?

d. What is the total change in tax due for the taxpayer because of the gains and losses in Scenario 4?

Answer 1

scenario 1
Ordinary income from salary			$100000
short term capital loss		($7000)
long term capital loss		($5000)
restricted setoff against salary			$3000
Taxable income is			$97000
Total tax saved on $ 3000 @ 22% is $660

scenario 2
Short term capital gain		$4000
Long term capital gain		$9000
additional amount of tax due will be
$ 4000 @ 22 % $880
$ 9000@ 15 % $1350
so the total additional tax will $2230

scenario 3
Ordinary income from salary		$100000
long term capital gain	$9000
long term capital loss	$5000
net long term gain (A)	$4000
short term capital gain	$4000
short term capital loss	$7000
net short term loss (b)	($3000)
(a)-(b)	$4000-($3000)
long term capital gain available	$1000
Total taxable income			$101000
total change in tax due
tax on salary is salary $ 100000 @22 % is $22000
tax on long term capital gain is $1000 @15 % is   $ 150
Total tax will be $ 22000 +$ 150 $ 22150 , so the total changes in tax is $ 150

scenario 4
Ordinary income from salary		$100000
long term capital gain	$ 9000
long term capital loss	($ 5000)
net gain (a)	$4000
short term capital gain	$4000
short term capital loss	($10000)
net short term loss (b)	($6000)
(A)-(b)	$ 4000-($6000) is ($2000)
net loss coming in head of capital gain is	($2000)
Total taxable income will be		$98000
tax on salary will be $98000 @ $21560

note : setoff restricted for net capital loss to setoff with other INCOME (SALARY) is $3000