Question

James sold an investment for $100,000 that he originally purchased for $80,000. Because he held the investment for 5 years, the gain qualifies for a 15% preferential rate. His marginal tax rate on ordinary income is 25%. The tax savings from the preferential rate is $.

Answer 1

James has a tax savings of $2,000 from the preferential tax rate when he sold his investment for a gain of $20,000, as the capital gains tax at the preferential rate is less than it would have been at his marginal tax rate.

Step-by-step explanation:

The question pertains to a scenario where James sold an investment with a capital gain that qualifies for a preferential tax rate. He sold the investment for $100,000 that was originally purchased for $80,000, resulting in a gain of $20,000. Given that the preferential tax rate on the gain is 15% and the marginal tax rate on ordinary income is 25%, we need to calculate the tax savings due to the preferential rate. To calculate the tax savings, we first calculate the tax that would be due without the preferential rate, which is the gain multiplied by the marginal tax rate: $20,000 × 25% = $5,000. Then we calculate the tax with the preferential rate: $20,000 × 15% = $3,000. The tax savings is the difference between these two amounts: $5,000 - $3,000 = $2,000. Hence, the tax savings from the preferential rate is $2,000.