Tom Johnson, whose marginal tax rate on ordinary income is 22%, sold four investment assets resulting in the following capital gains and losses. $\begin{array}{lll}
\text { Short-term capital gain } & \$ & 3,800 \
\text { Short-term capital loss } & \$ & (5,000) \
\text { Long-term capital gain } & \$ & 39,000 \
\text { Lonc-term capital loss } & \$ & (35,100)
\end{array}$ How much of Tom's net capital gain is taxed at 15%?

Question

Quizplus · Accepted Answer

The first step is to calculate Tom's total net capital gains. To do this, we add up the gains and losses:

$90,000 (long-term capital gain) +
$20,000 (short-term capital gain) -
$45,000 (long-term capital loss) -
$25,000 (short-term capital loss) =
$40,000 (total net capital gain)

Tom's marginal tax rate on this net capital gain is 22%, but some of it may be taxed at a lower rate. We need to determine how much of the net capital gain is taxed at 15%.

Long-term capital gains are taxed at a lower rate than short-term capital gains, so we'll start by looking at the $90,000 long-term capital gain. The maximum tax rate on long-term capital gains is 15% for taxpayers in the 25%, 28%, 33%, or 35% ordinary income tax brackets. Since Tom's marginal tax rate is 22%, his long-term capital gains will be taxed at 15%.

The remaining $10,000 of net capital gain is from short-term capital gains, which are taxed at Tom's ordinary income tax rate (22%). None of this amount is taxed at 15%.

Therefore, the amount of Tom's net capital gain taxed at 15% is equal to the amount of his long-term capital gain, which is $90,000. So the answer is C) $2,700.

Tom Johnson, Whose Marginal Tax Rate on Ordinary Income Is