Question

During 2019, your clients, Mr. and Mrs. Garcia, owned the following investment assets:

Investment Assets	Date Acquired	Purchase Price	Broker’s Commission Paid at Time of Purchase
300 shares of ALPHABET INC common	11/22/2016	$10,550	$150
200 shares of ALPHABET INC common	4/3/2017	$48,000	$250
3,000 shares of Amazon preferred	12/12/2017	$152,000	$1,350
2,100 shares of Oracle common	8/14/2018	$53,000	$650
451 Shares of Fidelity mutual fund	3/2/2019	$15,100	No load fund*

            *No commissions are charged when no load mutual funds are bought and sold.

In 2019, due to current market conditions, Mr. and Mrs. Garcia decided to invest in municipal bonds. In order to do this they needed to sell their mutual fund and most of their. The following investment assets were sold in 2019:

Investment Assets	Date Sold	Sale Price	Broker’s Commission Paid at Time of Sale
300 shares of ALPHABET INC common	5/6	$13,900	$100
3,000 shares of Amazon preferred	10/5	$224,900	$2,200
2,100 shares of Oracle common	8/15	$65,250	$550
451 Shares of Fidelity mutual fund	12/21	$15,500	No load fund*

*No commissions are charged when no load mutual funds are bought and sold.

The Garcias’ broker issued them a Form 1099-B showing the sales proceeds net of the commissions paid. For example, the ALPHABET INC sales proceeds were reported as $13,800 on the Form 1099-B they received.

In addition to the sales reflected in the table above, the Garcias provided you with the following additional information concerning 2019:

• The Garcias have a $3,500 short-term capital loss carryover and a $5,800 long-term capital loss carryover from prior years.
• The Garcias did not instruct their broker to sell any particular lot of ALPHABET INC stock.
• The Garcias earned $8,000 in municipal bond interest, $4,000 in interest from corporate bonds, and $5,000 in qualified dividends.
• Assume the Garcias have $130,000 of wage income during the year.

1. In Excel, calculate the Garcias’ taxable income and tax liability for the year with the following assumptions. Label clearly.

1. Ignoring the alternative minimum tax and any phase-out provisions
2. They will file jointly
3. They have no dependents
4. They don’t make any special tax elections
5. Their itemized deductions (including investment interest expense) total $26,000

b.   In Excel, assume the Garcias’ short-term capital loss carryover from prior years is $83,500 rather than $3,500 as indicated above. If this is the case, how much short-term and long-term capital loss carryover remains to be carried beyond 2019 to future tax years?

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Answer 1

First we need to categorize long term and short term sales. All sales except Fidelity Mutual fund are long term as the duration for which the shares were held is more than 1 year.

Then we need to calculate total long term gain and short term gain.

The following calculations are based on the assumption that FIFO method is used to dispose Alphabet stocks i.e. stocks purchased first will be sold first.

Long term gain = sales proceed less commission - cost of purchase including commissions

Alphabet Long term gain  = 13,900 - 100 - (10550+150) = $3,100

Amazon Long term gain = 224,900 - 2,2200 - (152,000+1,350) = $69,350

Oracle Long term gain = 65,250 - 550 - (53,000 + 650) = $11,050

Fidelity Mutual Fund Short term gain = 15,500 - 15,100 = $400

Total long term gain = 3,100 + 69,350 + 11,050 = $83,500

Total short term gain = $400

Taxable income includes wages, short term capital gain and interest whereas long term gains and qualified dividends are taxed at a lower capital gains tax rate.

Taxable income = 130,000 +8,000 +4,000= $142,000

Since we have a total short term capital loss carry over of $3500 we can use it to offset $400 of short term gain from mutual fund. The remaining $3,100 can be used to offset the long term capital gain.

Total long term capital loss carry over is $5,800. Hence the total amount to be offsetted is $5800+$3100 = $8900

Hence the total long term capital gains to be taxed = $83,500 - $8,900 = $74,600

Answer: Taxable income = $142,000 and Tax Liability = $74,600

Part B:

If short-term capital loss carryover from prior years is $83,500 rather than $3,500 then we can use $83,100 instead of $3,100 to offset the gains. Hence the total amount that can be used to offset is $5800 + $83,100 = $88,900

Since the long term capital gains is $83,500 then this will be completely offsetted by the total capital loss carryover and we will be left with 88,900 - 83,500 = $5,400 to be carried over as short term capital loss for future years.

The rule is to utilize long term capital gains carryover to offset long term capital gains and if there is a leftover then it can be used to offset short term capital gains and similar for short term capital gains carry over.

Answer: Short term capital loss carryover = $5,400 and long term capital loss carryover = 0