Tom Johnson, whose marginal tax rate on ordinary income is 35%, sold four investment assets resulting in the following capital gains and losses. How much of Tom's net capital gain is taxed at 15%?

Question

Tom Johnson, whose marginal tax rate on ordinary income is 35%, sold four investment assets resulting in the following capital gains and losses.  How much of Tom's net capital gain is taxed at 15%?

Quizplus · Accepted Answer

Tom has a total net capital gain of $18,000 - $5,000 - $2,500 + $1,500 = $12,000. 
The maximum amount of net capital gain that is taxed at 15% is the lesser of:
1. Tom's total net capital gain ($12,000) or 
2. The maximum amount of net capital gain that can be taxed at 15% based on Tom's taxable income.

Since Tom's taxable income is not given, we must estimate it. One possible estimate is to assume that Tom's ordinary income is $100,000. In this case, his taxable income is $100,000 + $12,000 = $112,000.

The maximum amount of net capital gain that can be taxed at 15% for someone in the 35% tax bracket is the excess of $39,375 (the upper limit of the 15% tax bracket) over the taxable income ($112,000), which is $0.

Therefore, none of Tom's net capital gain is taxed at 15%. The correct answer is D) $0.

Tom Johnson, Whose Marginal Tax Rate on Ordinary Income Is