What is the federal income tax owed by an investor in the 35 percent income tax

Question

What is the federal income tax owed by an investor in the 35 percent income tax bracket

(15 percent tax rate on long-term capital gains and dividend income)?

a. Megan sold Stock A for a short-term capital gain of $5,500; sold Stock B for a short-term capital loss of $2,100.

b. Margaret sold Stock A for a short-term capital loss of $2,000; sold Stock B for a short-term capital gain of $4,000.

c. Melissa is 70 years old and withdraws $1,000 from her Roth IRA account. Would the answer be different if she were 65 years old?

d. Morgan bought 100 shares of IBM in March for $100 a share and sold the shares in April for $110.

e. Murphy contributed $4,000 to an IRA and used the proceeds to purchase stock A for $4,000. The stock was subsequently sold for $4,500 after year had passed.

Explanation / Answer

a) in case of Megan...........short term capital loss offsets short term capital gain to the amount of $2100 and on remaining the tax is paid @ 35%

so, income tax = (short term capital gain - short term capital loss)* 35%

                           =( 5500 - 2100)*35% = 3400*35% = $1,190

b) in case of Margaret...........short term capital loss offsets short term capital gain to the amount of $2000 and on remaining the tax is paid @ 35%

so, income tax = (short term capital gain - short term capital loss)* 35%

                           =( 4000 - 2000)*35% = 2000*35% = $700

c) Any withdrawals from Roth IRA are not subject to current income taxes hence taking the funds out at age 65 instead of age 70 does not affect the taxation.

d) Buying share in March and selling them at profit in April would attract tasx on short term capital gain.

short term capital gain per share = 110 - 100 = 10

total short term capital gain = 10*100 = 1000

income tax on short term capital gain = 1000* 35% = 350

e) As Murphy contributes $4000 to IRA his current income taxes are reduced by($4,000)(0.35) = $1,400.

Later the sale of the stock in the IRA shall have no impact on current taxes owed

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