Question

Henrich is a single taxpayer. In 2018, his taxable income is $450,500. What is his income tax and net investment income tax liability in each of the following alternative scenarios? Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates, Estates and Trusts for reference.

What is the income tax and the net investment income tax for each of the following:

a. All of his income is salary from his employer.

b. His $450,500 of taxable income includes $2,000 of long-term capital gain that is taxed at preferential rates.

c. His $450,500 of taxable income includes $40,000 of long-term capital gain that is taxed at preferential rates.

d. Henrich has $195,250 of taxable income, which includes $50,100 of long-term capital gain that is taxed at preferential rates. Assume his modified AGI is $210,000.

     

Answer 1

(a) All of Henrich income is income from salary

Henrich is a single taxpayer and since all his income is from salary , he will pay tax according to the slab rates.

Total taxable income $ 450,500

Income slab	Tax rate	Amount ($)
on first $ 9525	10%	952.50
on next $ 29175 [ 38700-9525 ]	12%	3501
on next $ 43800 [ 82500- 38700]	22%	9636
on next $ 75000 [157500-82500]	24%	18000
on next $42500 [200000-157500]	32%	13600
on balance $ 250500	35%	87675
Total tax payable		133,364.50

Henrish has no investment income, hence net investment income tax is Nil

(b) The taxable income is $ 450,500.Since this falls in the taxable income slab of $ 425,801 to $ 500,000, the long term capital gain tax rate is 20%

Therefore tax on long term capital gain= 2000*20% = $ 400

Balance taxable income to be taxed as per slab rates = 450500-2000= $ 448500

Income slab	Tax rate	Amount ($)
on first $ 9525	10%	952.50
on next $ 29175 [ 38700-9525 ]	12%	3501
on next $ 43800 [ 82500- 38700]	22%	9636
on next $ 75000 [157500-82500]	24%	18000
on next $42500 [200000-157500]	32%	13600
on balance $ 248500	35%	86975
Total tax payable on balance income		132,664.50

Net investment income tax will be 3.8% of Lower of (i) Net investment income i.e 2000 or

(ii) Modified AGI-threshhold= $ 450500- $ 200000 = $ 250,500

Therefore Net investment income tax = 3.8% * 2000 = $ 76

Therefore total income tax liability = 400+ 132664.50+76 = $133,140.50

Note:(i) Considering the taxable income as Modified gross adjusted income

(ii) The threshhold for singles for computing net investment income tax is $200,000

(c) The taxable income is $ 450,500.Since this falls in the taxable income slab of $ 425,801 to $ 500,000, the long term capital gain tax rate is 20%

Therefore tax on long term capital gain = 40000*20% = $ 8000

Balance taxable income to be taxed as per slab rates = 450500-40000= $ 410,500

Income slab	Tax rate	Amount ($)
on first $ 9525	10%	952.50
on next $ 29175 [ 38700-9525 ]	12%	3501
on next $ 43800 [ 82500- 38700]	22%	9636
on next $ 75000 [157500-82500]	24%	18000
on next $42500 [200000-157500]	32%	13600
on balance $ 210500	35%	73675
Total tax payable on balance income		119,364.50

Net investment income tax will be 3.8% of Lower of (i) Net investment income i.e 40000 or

(ii) $ 450500- $ 200000 = $ 250,500

Therefore Net investment income tax = 3.8% * 40000 = $ 1520

Therefore total income tax liability = 8000+ 119364.50+1520 = $128,884.50

(d) Taxable income of Henrich is $ 195,250 which includes long term capital gain of $50,100. Since the taxable income falls in the slab of $157,501 to $200,000, the long term capital gain tax rate is 15%

Therefore tax on long term capital gain = 50100*15% = $ 7515

Balance taxable income to be taxed as per slab rates = 195250-50100= $ 145,150

Income slab	Tax rate	Amount ($)
on first $ 9525	10%	952.50
on next $ 29175 [ 38700-9525 ]	12%	3501
on next $ 43800 [ 82500- 38700]	22%	9636
on balance $ 62,650	24%	15036
Total tax payable on balance income		29,125.50

Net investment income tax will be 3.8% of Lower of (i) Net investment income i.e $ 50,100 or

(ii) $ 210000- $ 200000 = $ 10,000

Therefore Net investment income tax = 3.8% * 10000 = $ 380

Therefore total income tax liability = 7515+ 29125.50+380 = $37,020.50