Question

Bill and Laura are in the 39.6% tax bracket for ordinary income and the 20% bracket for capital gains (ignore the 3.8% additional tax on investment income for higher-income taxpayers.) They have owned several blocks of stock for many years. They are considering the sale of two blocks of stock. The sale of one block would produce a gain of $15,000. The sale of the other would produce a loss of $19,000. For purposes of this problem, ignore personal exemptions, itemized deductions and other phase-outs. They have no other gains or losses this year.
Required:
a. How much tax will they save if they sell the block of stock that produces a loss?
b. How much additional tax will they pay if they sell the block of stock that produces a gain?
c. What will be the impact on their taxes if they sell both blocks of stock?

Answer 1

Answer:

a) the maximum amount that Bill and Laura will be able to deduct during the current year is $3,000. Their remaining loss = $19,000 - $3,000 = $16,000. The remaining $16,000 loss must be carried forward and deducted in subsequent years, or year, depending on their future capital gains. Total tax saved during this year = $3,000 x 39.6% = $1,188.

b) additional tax liability = $15,000 x 20% = $3,000

c) if they sell both, then their long term capital gains = $15,000 - $19,000 = -$4,000. They can deduct $3,000 during the current year, and the remaining $1,000 loss can be deducted in subsequent years. Total tax saved during this year = $3,000 x 39.6% = $1,188.