Loretta has the following capital gains and losses during the current year:
Short-term capital loss $ 4,000
Collectibles gain 10,000
Long-term capital gain 8,000
Long-term capital loss carryover 2,000
Loretta is single and has a taxable income of $96,000 before considering the effect of her capital gains and losses. What is the effect of Loretta’s capital gains and losses on her taxable income and her income tax liability?
Loretta has a $4,000 short-term capital loss and a $16,000 net long-term capital gain. The short-term loss and the long-term gain are netted, resulting in a $12,000 net long-term capital gain for the year:
Short-term capital loss $ (4,000)
Collectibles gain $ 10,000
Long-term capital gain 8,000
Long-term capital loss carryover (2,000) 16,000
Net long-term capital gain $ 12,000
The $12,000 gain is added to gross income, increasing Loretta’s taxable income to $108,000. The net long-term capital gain of $12,000 consists of an adjusted net capital gain of $8,000 and a 28% tax rate gain of $4,000:
28% rate gain = $10,000 – $4,000 – $2,000 = $4,000
Adjusted net capital gain = $12,000 – $4,000 = $8,000
The adjusted net capital gain is taxed at 15%. Because Loretta is in the 33% marginal tax rate bracket, the $4,000 net 28% tax rate gain is taxed at 28%. Loretta’s income tax liability increases by $2,320:
Tax on adjusted net capital gain – $8,000 x 15% $1,200
Tax on 28% tax rate gain – $4,000 x 28% 1,120
Tax on capital gains $2,320
