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. (Assume the tax year is 2020).

	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

IN SCENARIO 1

INCOME OTHER THAN STOCKS   INCOME   $100000

LESS:

  SHORT TERM CAITAL LOSS $ 7000

LONG TERM CAPITAL LOSS     $5000

TOTAL INCOME $88000

TAX IMPLICATION

TAX ON INCOME OTHER THAN STOCKS ($100000*22%) $22000

LESS: TOTAL INCOME AFTER SETOFF LOSSES ($88000*22%) ($19360)

TAX SAVING $2640

CASE 2

TAX ON ORDINARY INCOME ($100000*22%) $22000

TAX ON SHORT TERM CAPITAL GAIN ($4000*22%) $880

TAX ON LONG TERM CAPITAL GAIN ($9000*15%) $1350

TOTAL TAX PAYABLE $24230

LESS: TAX ON ORDINARY INCOME $22000

ADDITIONAL TAX PAYABLE DUE TO CAPITAL GAINS $2230

CASE 3

TAX ON ORDINARY INCOME ($100000*22%) $22000

TAX ON LONG TERM CAPITAL GAIN (($9000-5000)*15%) $600

LESS: TAX SAVING DUE TO SHORT TERM CAPITAL LOSS

($7000-$4000)*22% ( $660)

TOTAL TAX PAYABLE $21940

TAX PAYALE ON ORDINARY INCOME $ 22000

SO,TAX SAVING DUE TO CAPITAL GAIN $60

CASE 4

TAX ON ORDINARY INCOME ($100000*22%) $22000

TAX ON LONG TERM CAPITAL GAIN (($9000-$5000)*15%) $600

LESS: TAX SAVING DUE TO SHORT TERM CAPITAL LOSS

($10000-$4000)*22% $(1320)

TOTAL TAX PAYABLE $21280

TAX PAYALE ON ORDINARY INCOME $22000

SO,TAX SAVING DUE TO CAPITAL LOSS $720