Sara is filing as head of household and has 2011 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

To calculate the tax on taxable income using the alternative tax method, we need to do the following:

1. Calculate regular tax on taxable income, including long-term capital gains at their respective tax rates:

- Regular taxable income: $27,000 - $18,650 (standard deduction for head of household) = $8,350
- Regular tax on $8,350: $995 (10% on first $9,525) 
- Tax on $10,000 long-term capital gain at 15%: $1,500 
- Tax on $3,000 long-term capital gain at 0%/15%: $0 (since it falls within the 0% bracket) 
- Total regular tax: $2,495 ($995 + $1,500)

2. Calculate alternative minimum tax (AMT) on taxable income, including long-term capital gains at a flat rate of 28%:

- AMT taxable income: $27,000 + $13,000 (net long-term capital gain) = $40,000 
- Exemption amount for head of household: $24,600 
- AMT base: $15,400 ($40,000 - $24,600) 
- AMT on $15,400 at 28%: $4,312 
- Note: Some adjustments may need to be made for certain itemized deductions, but they are not given in the problem.

3. Compare regular tax and AMT, and pay the higher amount:

- AMT of $4,312 is higher than regular tax of $2,495, so the alternative tax is $4,312. 
- However, Sara gets to subtract her regular tax from her AMT, which reduces her alternative tax bill:

Alternative tax = AMT - regular tax credit
Alternative tax = $4,312 - $2,495
Alternative tax = $1,817

Therefore, the tax on Sara's taxable income using the alternative tax method is $1,817, which is closest to choice C ($2,993). None of the other options are correct.

Sara Is Filing as Head of Household and Has 2011