Question

• Capital Gains and Losses. L, a single individual, earned salaries and wages of $64,000 and interest of $3,000 and dividends of $3,700 for the current year. In addi- tion, L sold the following capital assets: 10 shares LMN common stock, held ten months . 1990 Dodge sedan, used four years for personal purposes... 10 acres of land, held six years for investment. years for investment .............. $1,400 gain 2,600 loss 9,200 loss a. Compute L's overall capital gain or loss. b. Compute L's adjusted gross income.

Answer 1

• Long-term capital gains are derived from investments held for more than one year and are taxed according to graduated thresholds for taxable income at 0%, 15%, or 20%

short-term capital gain results from an asset owned for a year or less and is taxed as though it were ordinary income.

(a) 10 shares LMN common stock(10months) ...........................................+$1400 profit

1990 dodge sedan(car) used 4 years for personal purposes .................-$2600 loss

10 acres of land , held 6 years for investment........................................-$9200 loss

L's net capital gain/loss..........................................................................-$10,400 loss (+1400-2600-9200)

therefore , L suffered a net capital loss of $10,400.

(b)    Adjusted gross income  is an individual's total gross income minus specific deductions Gross income is sales price of goods or property, minus cost of the property sold, plus other income. It includes   wages, interest, dividends, business income, rental income, and all other types of income. Adjusted gross income is gross income less deductions from a business or rental activity and 21 other specific items.

Several deductions (e.g. medical expenses ) are limited based on a percentage of AGI. Certain phase outs, including   those of lower tax rates and itemized deductions, are based on levels of AGI. Many states base state income tax on AGI with certain deductions.

Gross income includes net gains for disposal of assets, including capital gains and capital losses. Losses on personal assets are not deducted in computing gross income or adjusted gross income.

  

10 shares LMN common stock(10months) ...........................................+$1400

1990 dodge sedan(car) used 4 years for personal purposes .................-$2600

10 acres of land , held 6 years for investment........................................-$9200

salary and wages earned......................................................................+$64000

interest earned ......................................................................................+$3000

dividents earned......................................................................................+$3700

L's adjusted gross income.........................................................+$60,300(+1400-2600- 9200+64,000+3000+3700)

therefore L's adjusted gross income is $60,300.