In 2001, Mrs. Qualley, contributed $100,000 in exchange for 1,000 shares of Little Corporation, which is a qualified small business. This year, Mrs. Qualley's only capital transaction was the sale of the 1,000 shares of Little qualified small business stock for $180,000. If Mrs. Qualley's marginal rate on ordinary income is 37%, compute the income tax on her capital gain from this sale.

Question

Quizplus · Accepted Answer

To calculate the tax on Mrs. Qualley's capital gain, we first need to determine her basis in the stock. Her basis is the amount she originally paid for the stock, which was $100,000.

Her capital gain is calculated as follows:

Sale Price - Basis = Capital Gain 
$180,000 - $100,000 = $80,000

Since Mrs. Qualley held the stock for more than one year, her capital gain qualifies for long-term capital gains treatment. Long-term capital gains are generally taxed at a lower rate than ordinary income.

The tax on Mrs. Qualley's capital gain is calculated as follows:

Capital Gain x Long-Term Capital Gains Rate = Tax on Capital Gain 
$80,000 x 20% = $16,000

However, Mrs. Qualley's marginal rate on ordinary income is 37%, which means that her long-term capital gains rate is 20% instead of 15%. Therefore, her tax on the capital gain is as follows:

Capital Gain x (Long-Term Capital Gains Rate + Additional 3.8% Net Investment Income Tax + Marginal Rate Difference) = Tax on Capital Gain 
$80,000 x (20% + 3.8% + 1.2%) = $11,200

Therefore, the correct answer is B) $11,200.