Sachi is single and has taxable income of $33,000 without considering the sale of a capital asset in November of 2019 for $20,000.That asset was purchased six years earlier and has a tax basis of $5,000.The tax liability applicable to only the capital gain is

Question

Quizplus · Accepted Answer

The capital gain is calculated as:
Sale price - Tax basis = Capital gain
$20,000 - $5,000 = $15,000

Since the asset was held for more than a year, the long-term capital gains tax rates apply. Sachi's taxable income puts her in the 15% tax bracket for long-term capital gains.

Tax liability = Capital gain x Tax rate
Tax liability = $15,000 x 0.15
Tax liability = $2,250

However, since Sachi's taxable income without considering the capital gain is $33,000, and the capital gain is added to that, her total taxable income for the year is $53,000. This puts her in the 22% tax bracket for ordinary income.

To calculate the total tax liability, we need to add the tax on the capital gain to the tax on the ordinary income:
Tax on ordinary income = $33,000 x 0.22 = $7,260
Total tax liability = $7,260 + $2,250 = $9,510

But we need to find the tax liability only applicable to the capital gain. To do that, we need to calculate the tax liability if the capital gain was her only income, and then subtract the tax liability if the gain was included with her ordinary income.

Tax on capital gain only = $15,000 x 0.15 = $2,250
Tax on ordinary income only = $0 (since there was no ordinary income)
Tax liability only on the capital gain = $2,250 - $0 = $2,250

Therefore, the answer is D) $1,294.

Sachi Is Single and Has Taxable Income of $33,000 Without