Question

During 2020, Inez (a single taxpayer) had the following transactions involving capital assets: Gain on the sale of unimproved land (held as an investment for 3 years) $6,000 Loss on the sale of a camper (purchased 2 years ago and used for family vacations) (5,000) Gain on the sale of ADM stock (purchased 9 months ago as an investment) 2,450 Gain on the sale of a fishing boat and trailer (acquired 18 months ago at an auction and used for recreational purposes) 1,000 Overall, Inez has a long-term capital gain of $ 6,000 and a short-term capital gain of $ 2,450 .

Required:
a. If Inez has taxable income (including the property transactions) of $188,450, what is the income tax regarding these transactions? Her marginal tax rate is 32%.
b. If Inez has taxable income (including the property transactions) of $32,250, what is the income tax regarding these transactions? Her marginal tax rate is 12%.

Answer 1

Gain on the sale of unimproved land is a long-term capital gain (6,000)

Gain on the sale of ADM stock is short term capital gain (2,450)

Gain on the sale of a fishing boat and trailer is a long-term capital gain (1,000)

So, the long-term capital gain = $6000 + $1000 = $7000. Short-term capital gain = $2,450

a. Here, Inez is in the 32% tax bracket, so her regular tax rate of 32% exceeds the alternative tax rate of 15%.

Hence, $7,000 long-term capital gain is taxed at 15%, and her short-term capital gain is taxed at 32%.

($7,000 x 15%) + ($2,450 x 32%)

= 1050 + 784

= $1,834

So, the tax is $1,834

b. Here, Inez is in the 12% tax bracket, her regular tax rate of 12% exceeds the alternative tax rate of 0%.

So, her $7000 long-term capital gain is taxed at 0%,

Her 2450 short-term capital gain is taxed at 12%.

= [(7000 x 0%) + ($2450 x 12%)]

= 0 + 294

= $294

So, the tax is $294.