Question

Chris has taxable income of $123,000. A portion of this income is from capital gains and should receive preferential tax treatment. List the steps below in the order in which they should occur for Chris to be able to determine his overall tax liability.

Answer 1

To determine his tax liability, Chris must calculate his AGI, subtract deductions and exemptions, apply standard rates to ordinary income, separate capital gains for preferential tax treatment, and account for tax credits and additional taxes for his final tax liability.

Step-by-step explanation:

When determining overall tax liability, Chris needs to follow several steps to account for his taxable income and capital gains. Below is the ordered list of steps he should take:

1. Calculate Adjusted Gross Income (AGI) by summing up all income sources, including wages, interest, and capital gains.
2. Subtract any applicable deductions and exemptions from the AGI to determine taxable income.
3. Apply the standard tax rates on ordinary income based on tax tables for different income levels.
4. Separate the portion of income that is from capital gains and apply the preferential tax rates applicable to long-term capital gains.
5. Aggregate the tax calculated on ordinary income and capital gains to get the preliminary tax liability.
6. Account for any tax credits or additional taxes such as the alternative minimum tax to adjust the preliminary figure.
7. Compute the final tax liability by summing up the taxes owed on ordinary income and capital gains, adjusted by any credits or additional taxes.

These steps allow Chris to effectively calculate his tax burden while ensuring he benefits from the preferential rates on his capital gains.