Financial Planning Exercise 3
Calculating taxes on security transactions
If Julia Diaz is single and in the 24% tax bracket, calculate the tax impact of each of the following security transactions. (Use the IRS regulations for capital gains in effect in 2018.)
EXHIBIT 3.2 Capital Gains Tax as of 2018 |
Short-term gains from the sale or exchange of property (investment assets not used in a business) and held for less than 12 months are taxed at the same rates as ordinary income (10%, 12%, 22%, 24%, 32%, 35%, and 37%). Long-term gains from the sale or exchange of property held for more than 12 months are taxed as follows: |
Ordinary Tax Rate |
Alternative Capital Gains Tax Rate |
|
10% or 12% |
0% |
22%, 24%, 32%, or 35% |
15% |
37% |
20% |
|
Treat each of the following cases as independent of the others.
- She sold stock for $1,160 that she purchased for $1,000 5 months earlier.Round the answer to the nearest cent. Tax savings should be preceded by a "-" sign.
$
- She sold bonds for $4,500 that she purchased for $3,500 3 years earlier.Round the answer to the nearest dollar. Tax savings should be preceded by a "-" sign.
$
- She sold stock for $1,260 that she purchased for $1,500 8 months earlier. Assume this to be the only Stock in Arabella's portfolio.Round the answer to the nearest cent. Tax savings should be preceded by a "-" sign.
$
Freya and Sebastian Hunter are married and have one child. Sebastian is putting together some figures so he can prepare the Hunters' joint 2018 tax return. So far, he’s been able to determine the following concerning income and possible deductions:
Total unreimbursed medical expenses incurred |
$1,150 |
Gross wages and commissions earned |
50,700 |
IRA contribution |
5,000 |
Mortgage interest paid |
5,100 |
Capital gains realized on assets held less than 12 months |
1,450 |
Income from limited partnership |
200 |
Interest paid on credit cards |
360 |
Qualified dividend income earned |
620 |
Sales taxes paid |
2,450 |
Charitable contributions made |
1,150 |
Capital losses realized |
3,500 |
Interest paid on a car loan |
550 |
Social Security taxes paid |
2,700 |
Property taxes paid |
650 |
State income taxes paid |
1,700 |
Given this information, determine the amount of the available itemized deductions. How much taxable income will the Hunters have in 2018? (Note: Assume that Sebastian is not covered by a pension plan where he works, his child qualifies for the child tax credit, and the standard deduction of $24,000 for married filing jointly applies.)Do not round your intermediate computations.
$
Effect of tax credit vs. tax exemption
By defining after-tax income, demonstrate the differences resulting from a $500 tax deduction versus a $500 tax credit for a single taxpayer in the 12% tax bracket with $30,000 of pre-tax income.Round your answers to two decimal places. (UseExhibit 3.3.)
After-tax income with tax deduction |
$ |
After-tax income with tax credit |
$
Calculating Taxable Income
Taxable income |
Rate |
|---|
$1 − $9,075 |
10.0% |
$9,076 − $36,900 |
15.0% |
$36,901 − $89,350 |
25.0% |
$89,351 − $186,350 |
28.0% |
$186,351 − $405,100 |
33.0% |
$405,101 − $406,750 |
35.0% |
Over $406,751 |
39.6% |
Using the previous tax table, compute the tax liability for each individual in the scenarios presented, rounding the liability to the nearest dollar. In addition, use the dropdown lists to identify the marginal tax rate and average tax rate for both Chloe and Clark.Chloe’s Tax ScenarioChloe is a young professional who lives in downtown San Francisco. She has taxable income of $94,235 as an advertising account executive for Charles Underwood Agency Inc.What is Chloe’stax liability?What is Chloe’s topmarginal tax rate? What is Chloe'saverage tax rate? Clark’s Tax ScenarioClark is a young professional who lives in downtown Seattle. He has taxable income of $62,000 as a medical sales rep for Frasier-dool Inc.What is Clark’stax liability?What is Clark’s topmarginal tax rate? What is Clark'saverage tax rate?
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