Ch 3 Solutions 2

# Ch 3 Solutions 2 - 65 Rikki has the following capital gains...

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65. Rikki has the following capital gains and losses for the current year: Short-term capital gain \$ 1,000 Long-term capital gain 11,000 Long-term capital loss 3,000 Collectibles gain 8,000 Collectibles loss 2,000 What is the effect of the capital gains and losses on Rikki's taxable income and her income tax liability? Assume that Rikki is in the 35% marginal tax rate bracket. Capital gains and losses from collectibles are treated as being held long-term in the capital gain and loss netting procedure. Rikki has a \$1,000 net short-term capital gain and a \$14,000 net long-term capital gain: Netting of short-term and long-term gains and losses: Short-term gain and loss netting: Net short-term capital gain \$ 1,000 Long-term gain and loss netting: Long-term capital gain \$ 11,000 Long-term capital loss (3,000) Collectibles gain 8,000 Collectibles loss (2,000 ) Net long-term capital gain \$ 14,000 Because all capital gains and losses have been reduced to a net gain position, no further netting is necessary. The net short-term and long- term capital gains are added to her gross income. Rikki's taxable income increases by \$15,000. Short-term gain = \$ 1,000 Net 28% rate gain = \$ 8,000 - \$2,000 = \$ 6,000 Adjusted net capital gain = \$14,000 - \$6,000 = \$ 8,000 The short-term gain is taxed at Rikki's 35% marginal tax rate (ordinary income). Her net collectible gain of \$6,000 is taxed at a maximum rate

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liability increases by \$3,230: Tax on \$ 1,000 short-term capital gain - \$ 1,000 x 35% \$ 350 Tax on \$ 6,000 net 28% rate gain - \$ 6,000 x 28% 1,680 Tax on \$22,000 adjusted net capital gain - \$ 8,000 x 15% 1,200 Increase in tax liability \$3,230 66. Polly has the following capital gains and losses for the current year: Short-term capital gain \$ 1,000 Short-term capital loss 8,000 Long-term capital gain 5,000 Collectibles gain 16,000 Collectibles loss 3,000 What is the effect of the capital gains and losses on Polly's taxable income and her income tax liability? Assume that Polly is in the 33% marginal tax rate bracket. Capital gains and losses from collectibles are treated as being held long-term in the capital gain and loss netting procedure. Polly has a \$7,000 short-term capital loss and an \$18,000 long term-capital gain. The short-term loss and the long-term gain are netted, resulting in an \$11,000 net long-term capital gain: Short-term gain and loss netting: Short-term capital gain \$ 1,000 Short-term capital loss (8,000 ) Net short-term capital loss \$ (7,000) Long-term gain and loss netting: Long-term capital gain \$ 5,000 Collectibles gain 16,000 Collectibles loss (3,000 ) Net long-term capital gain 18,000 Net long-term capital gain
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Ch 3 Solutions 2 - 65 Rikki has the following capital gains...

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