Question

Sachi is single and has taxable income of $33,000 without considering the sale of a capital asset in November of 2020 for $20,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain is: A) $0 B) $2,250 C) $3,000 D) $1,200

Answer is $1,200 but I need to how this was calculated because I got $2,250 and it was wrong.

Answer 1

To calculate the tax liability on the capital gain from the sale of the asset, you need to determine the amount of the gain and apply the appropriate tax rate. In this case, the gain is $15,000 and the tax liability on the capital gain would be $2,250.

Step-by-step explanation:

To calculate the tax liability on the capital gain from the sale of the asset, you need to determine the amount of the gain and apply the appropriate tax rate. In this case, the gain is $20,000 - $5,000 = $15,000. The tax rate for long-term capital gains depends on the taxpayer's income bracket. Based on the information provided, the taxpayer falls within the 15% tax bracket. Therefore, the tax liability on the capital gain would be 15% x $15,000 = $2,250.

However, since the tax basis and the sale price of the asset were not included in the taxpayer's taxable income, the capital gain is taxed separately. The tax liability on the capital gain alone would be 15% x $15,000 = $2,250. This means that the taxpayer would owe an additional $2,250 in taxes only on the capital gain.

Therefore, the correct tax liability applicable only to the capital gain would be $2,250, not $1,200.

Answer 2

Sachi's capital gain tax liability is calculated by considering the long-term capital gains tax rates and her other taxable income. A portion of the gain is taxed at 0% while the remainder is taxed at 15%, resulting in a total tax liability of $1,200 on the capital gain.

Step-by-step explanation:

To calculate tax liability on the capital gain, we need to determine the amount of the gain and the tax rate that applies. In this case, Sachi sold a capital asset for $20,000 which was purchased for $5,000, resulting in a capital gain of $15,000. According to the information provided, we know that for a single individual, the long-term capital gains tax rates for 2020 could be 0%, 15%, or 20% depending on the taxable income.

Assuming Sachi's other income places her in the 15% long-term capital gains tax bracket, her tax on the capital gain would be calculated as 15% of $15,000, which is $2,250. However, since her taxable income plus her capital gain does not exceed the threshold for the 0% capital gains tax rate ($40,000 for single filers in 2020), a portion of her capital gain would actually be taxed at 0%. The taxable income of $33,000 when added to the capital gain of $15,000 totals $48,000, making the first $7,000 of the capital gain taxed at the 0% rate ($40,000 threshold minus $33,000 taxable income) and the remaining $8,000 taxed at the 15% rate.

Therefore, Sachi's total tax liability on the capital gain would be 15% of $8,000, which is $1,200. This is how we arrive at the correct answer of $1,200 for the capital gain tax liability.