Question

Paul and Mary are in he 37 a bracket or ordinary income and the 20% bracket for capital gans gnore the 3 8% additional tax on in est ent income or higher-Income taxpayers. They have owned se era blocks o stock many ears. T ey are considering the sale of two blocks of stock. The sale of one block would p oduce a ga of S 12,000. The sale of the other would produce a loss S2000 For es of this proble ·Ignore any rest ons on deduc ins oed s based on AGI Te have no other gains or losses this year Read the requirements Requirement a. How much tax will they save if they sell the block of stock that produces a loss? Paul and Mary wil save $ Requirement b. How much additional tax will they pay if they sell the block of stock that produces a gain? Paul and Mary will pay an additional Requirement c. What will be the impact on their taxes if they sell both blocks of stock? Paul and Mary wl 1.110 2,400 The capital loss carryover will be S

Answer 1

Information provided:

Tax bracket on ordinary income - 37%

Tax bracket on capital gain - 20%

Gain from sale of 1 block - $12,000

Loss from sale of 1 block - $20,000

Solution

a) Tax saved if they sell the block of stock that produce a loss

Since capital loss can be adjusted against ordinary income to the extent of $3,000 in a year, Paul and Mary will adjust $3,000 against their ordinary income and will thereby save tax on their ordinary income as per the following calculation:

       =      $3,000*37%(ordinary income tax rate)

      =      $1,110

b) Additional tax paid if they sell the block of stock that produce a gain

They have to pay tax @ 20%(capital gain tax rate) over the gain ($12,000) earned, calculated as follows:

      = $12,000*20%

      = $2,400

c) Impact on taxes if both the blocks of stock are sold

Capital Gain = $12,000

Capital Loss = $20,000

Assumptions - We have assumed that the gain and loss mentioned in the question above is long term since the stocks are held for many years

Please note: long term capital loss can be adjusted only against long term capital gains.

Answer -

= $20,000-$12,000 = $8,000

$12,000 capital loss can be adjusted against capital gain and remaining capital loss of $8,000 can be carried forward for 8 assessment years(AY) immediately following the AY in which loss has been computed and no tax needs to be paid on capital gain.

Let me know in case any further clarifications are required in the above solution