Mr. Imhoff recognized a $25,700 net long-term capital gain and a $33,000 net short-term capital loss this year. What is his current year tax savings from the capital loss if his marginal rate on ordinary income is 35% and his preferential rate on adjusted net capital gain is 20%?

Question

Quizplus · Accepted Answer

Mr. Imhoff can use his $33,000 net short-term capital loss to offset the $25,700 net long-term capital gain, leaving him with a $7,300 net short-term capital loss. This loss can be deducted against his ordinary income, which is taxed at a 35% marginal rate. Therefore, his tax savings are $7,300 * 35% = $2,555 from the net capital loss offset plus $25,700 * 20% = $5,140 from the capital gains tax savings, totaling $2,555 + $5,140 = $7,695. However, the correct interpretation is that the $7,695 represents the total tax effect, not a cost, making the correct answer related to the tax savings from utilizing the capital losses and gains. The calculation error in the explanation led to an incorrect conclusion. The correct tax savings calculation should consider the netting process and the applicable tax rates correctly. After offsetting the long-term capital gain with the short-term capital loss, the remaining loss can be used to offset ordinary income, leading to tax savings based on the marginal tax rate. The correct calculation for tax savings should directly apply the marginal and preferential rates to the netted amounts without the error in summing the effects as done in the provided explanation. The correct tax savings are calculated by first applying the $25,700 long-term capital gain against the $33,000 short-term capital loss, leaving a $7,300 short-term capital loss. This loss can offset ordinary income, resulting in a tax savings of $7,300 * 35% = $2,555. The initial explanation mistakenly combined effects in a manner that does not accurately reflect the question's scenario. The correct answer reflects the tax savings from utilizing the capital losses against both capital gains and ordinary income at the specified rates.

Mr Imhoff Recognized a $25,700 Net Long-Term Capital Gain and a $33,000