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

First, we need to calculate Tom's total net capital gain by adding up all of his gains and losses.

$20,000 (long-term gain) - $8,000 (long-term loss) = $12,000 (long-term net gain)
$10,000 (short-term gain) - $5,000 (short-term loss) = $5,000 (short-term net gain)

$12,000 + $5,000 = $17,000 (total net capital gain)

Next, we need to determine how much of Tom's net capital gain is taxed at 15%. The formula for this is:

Net capital gain x lower tax rate = amount taxed at 15%

We know that Tom's marginal tax rate on ordinary income is 35%, so the lower tax rate (for capital gains) is 15% (the higher rate is 20%).

Using the formula above, we get:

$17,000 x 0.15 = $2,550

So $2,550 of Tom's net capital gain is taxed at the lower rate of 15%. Therefore, the answer is C) $2,700.

Tom Johnson, Whose Marginal Tax Rate on Ordinary Income Is