Chapter 3 Financial Planning Exercise 3 Calculating taxes on security transactio

Question

Chapter 3
Financial Planning Exercise 3
Calculating taxes on security transactions

If Olivia Garcia is single and in the 25% tax bracket, calculate the tax associated with each of the following transactions. (Use the IRS regulations for capital gains in effect in 2014.)

Treat each of the following cases as independent of the others.

She sold stock for $1,890 that she purchased for $1,500 10 months earlier. Round the answer to the nearest cent. Tax savings should be preceded by a "-" sign.
$   

She sold bonds for $3,300 that she purchased for $2,000 3 years earlier. Round the answer to the nearest dollar. Tax savings should be preceded by a "-" sign.
$  

She sold stock for $770 that she purchased for $1,000 14 months earlier. Assume this to be the only Stock in Olivia's portfolio. Round the answer to the nearest cent. Tax savings should be preceded by a "-" sign.
$  

EXHIBIT 3.2  Capital Gains Tax Categories as of 2014 Capital gains tax rates are as low as 0 percent for low-income or as high as 28 percent for higher income levels and certain types of assets, so long as the holding period is more than 12 months. Holding period Tax Brackets/Assets Sold (2014) Tax on Capital gains Less than 12 months All (10%, 15%, 25%, 28%, 33%, 35%, and Same as ordinary income 39.6%) - any asset sold Over 12 months 10% and 15% - assets other than real estate and collectibles 0% 25%, 33%, 35%, 39.6% 15%, or 20% (later only if in 39.6% tax bracket) Sale of depreciable real estate 25% on gain up to depreciation amount Collectibles 28% all gains from collectibles

Explanation / Answer

1: Gain on sale= 1890-1500 = $390

Tax on capital gain is same as ordinary income= 390*25% =$97.5

2: Gain on sale of bonds= 3300-2000= $1300

Tax on capitalgain = 1300*15% = $195

3: Gain on sale= 770-1000= - $230

Tax saving = - 230*15% = - $34.5

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