Question

Sarah is single. She files her tax return as Single. Her 2020 income from wages is $450,400. She has “net long-term capital gains” of $100,000. Total 2020 gross income is $550,400. Sarah is under 65 years of age and does not itemize her deductions. What is Sarah’s total federal income tax?

A) $112,829.75       

B) $128,095.50.     

C) $147,922.50

D) $149,701

please show work thank you

Answer 1

$ 147,922.50 is the correct alternative .

Explanation :

Gross Income including long term capital gain	550,400
Less: Standard deduction	12,400
Net taxable income including net long term capital gain	538,000

Net taxable long term capital gain $ 100,000

So, taxable regular income = $ 538,000 - $ 100,000 = $ 438,000

Calculation for tax liability on regular taxable income :

Taxable income bracket	Tax rate	Tax liability
$ 0 to $ 9,875	10%	987.5
$ 9,876 to $ 40,125	12%	3,630
$ 40,126 to $ 85,525	22%	9,988
$ 85,526 to $ 163,300	24%	18,666
$163,301 to $ 207,350	32%	14,096
$207,351 to $ 438,000	35%	80,727.5
Tax liability on regular taxable income	=	128,095

Calculation for long term capital gain tax:

Taxable income bracket	Tax rate	Tax liability
$ 0 to $ 40,000	0%	0
$ 40,001 to $ 441,450	15%	517.5*
$ 441,450 to 538,000	20%	19,310
Tax liability on net long term capital gain	=	19,827.5

Calculation for total federal income tax :

Tax liability on regular taxable income	128,095
Tax liability on net long term capital gain	19,827.5
Total federal income tax	147,922.50

* Out of taxable income $ 441,450 , previously regular taxable income of $ 438,000 has been taxed at a regular tax rate. So to calculate tax on net long term capital gain we have to deduct $ 438,000 from $ 441,450 and subtracted result  will be taxed @ 15%. Balancing amount of net capital gain that is [ 100,000 - ( 441,450 - 438,000] = $ 96,550 taxed @ 50% as per scheduled tax slab.

Long term capital gain tax = [ ( $ 441,450 - $ 438,000)] X 15% + [ $ 100,000 - ( $ 441,450 - $ 438,000)] X20% = $ 517.5 + $ 19,310 = $ 19,827.5

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