Question

During the current year, Ron and Anne sold the following assets: (Use the dividends and capital gains tax rates and tax rate schedules.) Capital Asset Market Value Tax Basis Holding Period L stock $ 53,600 $42,800 > 1 year M stock 31,600 40,800 > 1 year N stock 33,600 23,800 < 1 year O stock 29,600 34,800 < 1 year Antiques 10,600 5,800 > 1 year Rental home 303,600* 91,800 > 1 year $30,000 of the gain is 25 percent gain (from accumulated depreciation on the property). Ignore the Net Investment Income Tax. a. Given that Ron and Anne have taxable income of only $23,600 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2019 assuming they file a joint return? (Round all your intermediate computations to the nearest whole dollar amount.) b. Given that Ron and Anne have taxable income of $403,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability

Answer 1

Part A

      Ron and Anne’s netting process is reflected in the following table:

Description	Short-Term	Long-Term 28%	Long-Term 25%	Long-Term 0/15/20%
Stock N	$9800
Stock O	$(5200)
Step 1:	$4600
Antiques		$4800
Unrecaptured §1250 Gain			$30,000
Remaining Gain from Rental Property				$181800
Stock L				$10800
Stock M				$(9200)
Step 2:				$183400
Steps 3(B): Go to step 6
Step 4 : Go to step 5
Step 5 :	$4600	$4800	$30,000	$183400

            Ron and Anne’s ordinary income will increase from $23600 to $28200 due to their $4600 net short-term capital gain. Ron and Anne’s gross tax liability of $32320 is computed as follows:

Amount and Type of Income	Applicable Rate	Tax	Explanation
$19400; ordinary	10%	$1,940	$19,400 × 10% The first $19,400 of Ron and Anne’s $28200 of ordinary income is taxed at 10%
$8800; ordinary	12%	$1056	$1,950 × 12%. Ron and Anne’s remaining $8800 of ordinary income (28200 – 19,400) is taxed at 12%.
$30,000; 25% rate capital gain	12%	$3,600	$30,000 × 12% The 25% gains are taxed at the lower of Ron and Anne’s marginal tax rate (12%) or 25%. In this case, the $30,000 of gains will be taxed at 12%.
$4800 28% rate capital gains	12%	$576	$4800 × 12% The 28% gains are taxed at the lower of Ron and Anne’s marginal tax rate (12%) or 28%. In this case, the $3,000 of gains will be taxed at 12%.
$15750; 0/15/20% rate capital gains	0%	$0	$15750 × 0% $15750 ($78750 - $28200 ordinary income - $30,000 25% capital gain - $4800 28% capital gain) of 0/15/20% rate capital gain fits into the remaining space below the maximum zero rate amount ($78750), so it is taxed at 0%.
$154,800; 0/15/20% rate capital gains	15%	$25148	$167650 × 15% All of the remaining $154,800 ($183400 - $15750) of 0/15/20% capital gain is taxed at 15% because Ron and Anne’s taxable income (including the gains) is above the maximum zero rate amount ($78750) and the maximum 15-percent rate amount ($488850).
Gross tax liability		$32320

Part B

Ron and Anne’s ordinary income will increase from $403,000 to $407800 due to their $4800 net short-term capital gain. Ron and Anne’s gross tax liability of $134601 is computed as follows:

     

Amount and Type of Income	Applicable Rate	Tax	Explanation
$19,400; ordinary	10%	$1,940	$19,400 × 10% The first $19,400 of Ron and Anne’s $407800 of ordinary income is taxed at 10% (see MFJ tax rate schedule for this and other computations).
$59550; ordinary	12%	$7146	$59550 × 12%. The next $58,350 ($78950-19400) of Ron and Anne’s $407800 of ordinary income is taxed at 12%.
$89450; ordinary	22%	$19679	$89450 × 22% The next $87,600 ($168400-$78950) of Ron and Anne’s $407800 of ordinary income is taxed at 22%.
$153050; ordinary	24%	$36732	The next $153050 ($321450-$168400) of Ron and Anne’s $407800 of ordinary income is taxed at 24%
$86350	32%	$27632	The remaining $86350 ($407800 - $321450) of Ron and Anne’s $407800 ordinary income is taxed at 32%.
$81050; 0/15/20% rate capital gains	15%	$12158	$81050 × 15% $78,000 ($488850 - $407800 ordinary income) of 0/15/20% rate capital gain fits below the maximum 15-percent rate amount ($488850), so it is taxed at 15%.
$100,000; 0/15/20% rate capital gains	20%	$20470	$102350 × 20% All of the remaining $133,000 ($183400 - $81050) of 0/15/20% capital gain pushes Ron and Anne’s taxable income above the maximum 15-percent rate amount ($488850) so it is taxed at 20%.
$30,000; 25% rate capital gains	25%	$7,500	$30,000 × 25%
$4800; 28% rate capital gains	28%	$1344	$4800 × 28%
Gross tax liability		$134601