Question

Christina's taxable income is $35,000, Charles' is $50,000, and Chris' is $500,000. Each of these taxpayers additionally earned $1,000 of long-term capital gain income in 2019. All of the taxpayers file as single. Which of the following answers is correct regarding the amount of tax liability assessed on the capital gain?

a) $0 for all taxpayers
b) $150 for Christina, $200 for Charles, $238 for Chris
c) $150 for Christina and Charles, $238 for Chris
d) $238 for Chris only

Answer 1

$150 for Christina and Charles, $238 for Chris

Thus the correct option is (C).

Step-by-step explanation:

The correct answer is (c). The tax liability on long-term capital gains depends on the taxpayer's marginal tax rate. For Christina and Charles, whose taxable incomes are $35,000 and $50,000 respectively, the capital gain is taxed at a rate of 15%. Therefore, the tax liability for each of them would be
`\( $1,000 * 0.15 = $150 \).`

On the other hand, Chris has a higher taxable income of $500,000, placing him in a higher tax bracket with a capital gains tax rate of 20%. Hence, Chris' tax liability on the $1,000 capital gain would be
`\( $1,000 * 0.20 = $200 \).` Therefore, the correct breakdown of tax liabilities for the three taxpayers is $150 for both Christina and Charles and $200 for Chris, resulting in option (c) being the accurate answer.

Understanding the tax implications on capital gains is essential for effective tax planning. The progressive nature of the tax system means that individuals with higher incomes generally face higher tax rates on their capital gains, as illustrated in this scenario.

Thus the correct option is (C).