Question

The losses that are subject to the carryforward retain their character as short-term or long-term in future years. Long-term capital losses that have been carried forward offset capital gains in the following order:

1. Capital gains taxed at 28%
2. Capital gains taxed at 25%
3. Capital gains taxed at 20% (or 15% for some taxpayers)

Answer 1

Capital losses carry forward and retain their character as short or long term, offsetting capital gains in order of the tax rates, highest first (28%, 25%, and then 20% or 15%). Corporate profits, tax policies, and capital gains taxation significantly impact corporate tax planning, investment decisions, and economic growth.

Step-by-step explanation:

The question pertains to the treatment of capital losses when they are carried forward into future tax years for offsetting against capital gains. Capital gains can be taxed at different rates depending on their nature, which may include 28%, 25%, or the more common 20% or 15% rates. When applied to future gains, carried forward capital losses first offset gains taxed at the highest rate (28%), followed by rates of 25%, and then the remaining capital gains which could be taxed at 20% or 15%.

Review of historical corporate profits after tax can provide insight into how businesses might utilize these tax mechanisms to manage their taxable income. It has been observed from Figure 17.2 in the Federal Reserve Economic Data (FRED) that corporate profits after tax tend to fluctuate, showing a significant drop in 2008 and 2009, highlighting the importance of tax planning for corporations.

Understanding how capital gains taxes impact savings and investments is crucial, as lower taxes on capital gains tend to encourage investment and, consequently, economic growth. Therefore, tax policies such as those dealing with capital losses carryforward, and differential tax rates on capital gains can significantly affect investment decisions and economic performance.