How much income tax results if Olivia has income of $500,000? If her income is $50,000?

Question

During the year, Olivia had the following transactions involving capital assets:

Gain on the sale of unimproved land (held as an investment for 4 years) $4,000,

Loss on the sale of a camper (purchased 2 years ago and used for family vacations) (5,000 ),

Loss on the sale of IBM stock (purchased 9 months ago as an investment) (1,000 ),

Gain on the sale of a fishing boat and trailer (acquired 11 months ago at an auction and used for recreational purposes) 2,000.

Assume Olivia is single. How much income tax results if Olivia has income of $500,000? If her income is $50,000?

Answer 1

1. Capital Gains and Losses

1. Unimproved land: $4,000 long-term capital gain.
2. Camper: $5,000 loss, but not deductible (personal use).
3. IBM stock: $1,000 short-term capital loss.
4. Fishing boat: $2,000 short-term capital gain.

2. Netting Capital Gains and Losses

1. Short-term: $2,000 gain - $1,000 loss = $1,000 net gain.
2. Long-term: $4,000 gain (loss on camper not deductible).
3. Total capital gain = $1,000 (short-term) + $4,000 (long-term) = $5,000.

3. Taxable Income

1. $500,000 income: Total taxable = $500,000 + $5,000 = $505,000.
2. $50,000 income: Total taxable = $50,000 + $5,000 = $55,000.

4. Tax Calculation

1. For $500,000: Taxed at progressive income tax rates + 15% on long-term capital gains.
2. For $50,000: Taxed at 22% for ordinary income + 15% on long-term gains, short-term taxed as ordinary income.