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.

Determine the amount of taxable income from capital gains.
Apply the appropriate tax rate to the taxable income.
Subtract any deductions and credits from the overall tax liability.
Calculate the regular tax liability using the tax rate schedule.

Answer 1

To determine overall tax liability, Chris must determine taxable income from capital gains, apply appropriate tax rates to all income, calculate regular tax liability, and subtract deductions and credits.

Step-by-step explanation:

To determine Chris's overall tax liability with taxable income of $123,000, which includes capital gains, the following steps should be taken in order:

1. Determine the amount of taxable income from capital gains.
2. Apply the appropriate tax rate to the taxable income derived from both regular income and capital gains.
3. Calculate the regular tax liability using the tax rate schedule for the non-capital gains portion of the income.
4. Subtract any deductions and credits from the overall tax liability to arrive at the final tax owed.

It's important to note that capital gains may be taxed at a different rate than ordinary income, reflecting the preferential treatment often given to investment income. The marginal tax rate applies to the highest dollar of income earned, and as income increases, so does the tax rate applied to the last dollar earned, also known as the progressive tax system.