Sara is filing as head of household and has 2012 taxable income of $27,000 which includes $13,000 of net long-tem capital gain. The net long-term capital gain is made up of $10,000 25% gain and $3,000 0%/15% gain. What is the tax on her taxable income using the alternative tax method?

Question

Quizplus · Accepted Answer

Using the alternative tax method, we need to first calculate the tax on the ordinary income and the tax on the net long-term capital gain separately, and then add them together. 
Tax on ordinary income: 
Sara's taxable income is $27,000 and she is filing as head of household. Using the tax brackets for 2012, we can calculate her tax on ordinary income as follows: 
- $8,700 taxed at 10% = $870 
- ($27,000 - $8,700) taxed at 15% = $2,355 
Total tax on ordinary income = $3,225

Tax on net long-term capital gain: 
The $10,000 gain is taxed at 25%, so the tax on that portion is $2,500. The $3,000 gain is taxed at 0%/15%, which means it is partially taxed at 0% and partially taxed at 15%. To calculate the tax on that portion, we need to first figure out how much of the gain is taxed at each rate. Since the $3,000 gain is less than Sara's taxable income minus the maximum amount of capital gain that can be taxed at 0% (which is $35,350 for head of household filers in 2012), all of the $3,000 gain will be taxed at 0%. Therefore, the tax on the net long-term capital gain is: 
- $10,000 taxed at 25% = $2,500 
- $3,000 taxed at 0% = $0 
Total tax on net long-term capital gain = $2,500

Total tax using the alternative tax method = tax on ordinary income + tax on net long-term capital gain = $3,225 + $2,500 = $5,725 
However, since the tax on the net long-term capital gain cannot be greater than the amount of tax on the ordinary income, the alternative tax is limited to $3,225. Therefore, the correct answer is C) $2,980.

Sara Is Filing as Head of Household and Has 2012