Question

Bill and Laura are in the 39.6% tax bracket for ordinary income and the 20% bracket for capital gains (ignore the 3.8% additional tax on investment income for higher-income taxpayers.) They have owned several blocks of stock for many years. They are considering the sale of two blocks of stock. The sale of one block would produce a gain of $15,000. The sale of the other would produce a loss of $19,000. For purposes of this problem, ignore personal exemptions, itemized deductions and other phase-outs. They have no other gains or losses this year.

Required:
a. How much tax will they save if they sell the block of stock that produces a loss?
b. How much additional tax will they pay if they sell the block of stock that produces a gain?
c. What will be the impact on their taxes if they sell both blocks of stock?

Answer 1

To calculate the tax savings from selling a stock that produces a loss, multiply the loss amount by the capital gains tax rate. For additional tax on a stock that produces a gain, multiply the gain amount by the capital gains tax rate. If selling both stocks results in a net loss, there will be no additional tax to pay.

Step-by-step explanation:

To calculate the tax savings from selling the block of stock that produces a loss, you will need to multiply the loss amount by the capital gains tax rate.

In this case, Bill and Laura are in the 20% tax bracket for capital gains.

So, the tax savings will be $19,000 multiplied by 20% which equals $3,800.

For the additional tax they will pay if they sell the block of stock that produces a gain, you will need to multiply the gain amount by the capital gains tax rate.

In this case, Bill and Laura are in the 20% tax bracket for capital gains.

So, the additional tax will be $15,000 multiplied by 20% which equals $3,000.

If they sell both blocks of stock, the total gain will be $15,000 - $19,000 = -$4,000.

Since this is a net loss, there will be no additional tax to pay.

They will only benefit from the tax savings of the loss.