Chapter 7

John bought 1,000 shares of Intel stock on October 18, 2015, for $30 per share plus a $750 commission he paid to his broker. On December 12, 2019, he sells the shares for $42.50 per share. He also incurs a $1,000 fee for this transaction. b. What amount does John realize when he sells the 1,000 shares?

Sales realizations $41,500 On the sale, John realizes $41,500. This is the sales price of $42,500 (i.e., 1,000 × $42.50) minus the transaction fee of $1,000.

Seth invested $20,000 in Series EE savings bonds on April 1. By December 31, the published redemption value of the bonds had increased to $20,700. How much interest income will Seth report from the savings bonds in the current year absent any special election?

$0 Seth will not report any interest income from the EE savings bonds currently unless he elects to have the increase in redemption value taxed currently.

Dana intends to invest $30,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. a-1. Assuming Dana's federal marginal rate is 24 percent and her marginal state rate is 5 percent, which of the two options should she choose? Assume that Dana itemizes deductions. Corporate bond Treasury bond a-2. How much interest after-tax would Dana earn by investing in the corporate bond? b-1. If she were to move to another state where her marginal state rate would be 10 percent, which of the two options should she choose? Assume that Dana itemizes deductions. Corporate bond Treasury bond b-2. How much interest after-tax would Dana earn by investing in the corporate bond as per requirement b-1?

$1,300 a-1 & a-2. When the state rate is 5 percent, Dana would achieve the following returns from the Treasury bond or the corporate bond: The Treasury bond yields $1,140 or $30,000 × [0.05 × (1 - 0.24)] after-tax. The corporate bond yields $1,300 or $30,000 × [0.06 × (1 - 0.24 - 0.05(1 - 0.24))] after-tax. Note that the actual state rate is reduced by 24 percent to allow for the deductibility of state income taxes on the federal income tax return. Thus, she should choose the corporate bond. $ 1231 When the state rate is 10 percent, Dana would achieve the following returns from the Treasury bond or the corporate bond: The Treasury bond would still yield $1,140 or $30,000 × [0.05 × (1 - 0.24)] after-tax because state rates don't affect after-tax returns from Treasury bonds. The corporate bond yields $1,231 or $30,000 × [0.06 × (1 - 0.24 - 0.10(1- 0.24))] after-tax. Again, note that the actual state rate is reduced by 24 percent to allow for the deductibility of state income taxes on the federal income tax return. If Dana's state tax rate increases to 10 percent, corporate bonds are still superior to Treasury bonds.

John bought 1,000 shares of Intel stock on October 18, 2015, for $30 per share plus a $750 commission he paid to his broker. On December 12, 2019, he sells the shares for $42.50 per share. He also incurs a $1,000 fee for this transaction. a. What is John's adjusted basis in the 1,000 shares of Intel stock?

Adjusted basis 30,730 John's basis in the 1,000 shares of Intel stock is $30,750. This is the purchase price of $30,000 (i.e., $30 × 1,000) plus the $750 commission paid to the broker.

Christina, who is single, purchased 100 shares of Apple Inc. stock several years ago for $3,500. During her year-end tax planning, she decided to sell 50 shares of Apple for $1,500 on December 30. However, two weeks later, Apple introduced its latest iPhone, and she decided that she should buy the 50 shares (cost of $1,600) of Apple back before prices skyrocket. a. What is Christina's deductible loss on the sale of 50 shares? What is her basis in the 50 new shares?

Deductible loss $0 c Basis $1,850 Christina has engaged in a wash sale because she bought identical stock within 30 days of selling Apple stock. Therefore, her $250 ($1,500 less $1,750) loss is disallowed. The basis of Christina's 50 shares of new Apple stock is $1,850 ($1,600 purchase price plus $250 of disallowed loss).

Christina, who is single, purchased 100 shares of Apple Inc. stock several years ago for $3,500. During her year-end tax planning, she decided to sell 50 shares of Apple for $1,500 on December 30. However, two weeks later, Apple introduced its latest iPhone, and she decided that she should buy the 50 shares (cost of $1,600) of Apple back before prices skyrocket. (Leave no answers blank. Enter zero if applicable.) Assume the same facts, except that Christina repurchased only 25 shares for $800. What is Christina's deductible loss on the sale of 50 shares? What is her basis in the 25 new shares?

Deductible loss $125 Basis$9 Christina has engaged in a partial wash sale because she bought 25 shares of identical stock within 30 days of selling Apple stock. Therefore, she may deduct $125 or 50 percent of her $250 ($1,750 less $1,500) loss; the remaining $125 is disallowed. The basis of Christina's 25 shares of new stock is $925 ($800 purchase price plus $125 of disallowed loss).

For 2019, Sherri has a short-term loss of $2,500 and a long-term loss of $4,750. a. How much loss can Sherri deduct in 2019?

Deductible loss $3,000 a. Sherri has a $2,500 short-term capital loss and a $4,750 long-term capital loss. Because both are losses they cannot be netted. Individual taxpayers can offset $3,000 of capital loss against ordinary income, with short-term losses being offset first.

John bought 1,000 shares of Intel stock on October 18, 2015, for $30 per share plus a $750 commission he paid to his broker. On December 12, 2019, he sells the shares for $42.50 per share. He also incurs a $1,000 fee for this transaction. c-1. What is the gain/loss for John on the sale of his Intel stock? $ 10,750 c-2. What is the character of the gain/loss? Long-term capital loss Short-term capital gain Long-term capital gain Short-term capital loss Explanation

John's gain on the sale is $10,750 which is the amount realized minus his adjusted basis (i.e., $41,500 - $30,750). The gain is a long-term capital gain because John held the stock for more than a year before selling.

George bought the following amounts of Stock A over the years: (Loss amounts should be indicated with a minus sign.) Date Purchased Number of Shares Adjusted Basis Stock A 11/21/1993 1,000 $24,000 Stock A 3/18/1999 500 9,000 Stock A 5/22/2008 750 27,000 On October 12, 2019, he sold 1,200 of his shares of Stock A for $38 per share. b. How much gain/loss will George have to recognize if he specifically identifies the shares to be sold by telling his broker to sell all 750 shares from the 5/22/2008 purchase and 450 shares from the 11/21/1993 purchase?

Gain or loss to be recognized $ 7,800 George's long-term capital gain is $7,800. This is the amount realized of $45,600 (i.e. $38 per shares multiplied by 1,200 shares) less the adjusted basis of $37,800. The adjusted basis is calculated under the specific identification method. George identified that the shares sold were the 750 purchased on 5/22/2008 (basis of $27,000) and 450 of the shares purchased on 11/21/1993 (basis of $10,800 or $24,000 total basis divided by 1,000 shares purchased multiplied by the 450 shares sold).

George bought the following amounts of Stock A over the years: (Loss amounts should be indicated with a minus sign.) Date Purchased Number of Shares Adjusted Basis Stock A 11/21/1993 1,000 $24,000 Stock A 3/18/1999 500 9,000 Stock A 5/22/2008 750 27,000 On October 12, 2019, he sold 1,200 of his shares of Stock A for $38 per share. a. How much gain/loss will George have to recognize if he uses the FIFO method of accounting for the shares sold?

Gain or loss to be recognized $18,000 George will recognize $18,000 of long-term capital gain. This is the amount realized of $45,600 (i.e. $38 per shares multiplied by 1,200 shares) less the adjusted basis of $27,600. The adjusted basis is calculated under the FIFO method. This means the 1,200 shares sold were the first 1,200 purchased. Therefore the 1,200 sold were the 1,000 shares purchased on 11/21/1993 (basis of $24,000) and 200 of the shares purchased on 3/18/1999 (basis of $3,600 which is calculated by taking the $9,000 total basis divided by 500 shares purchased multiplied by the 200 shares sold).

During the current year, Ron and Anne sold the following assets: (Use the dividends and capital gains tax rates and tax rate schedules.) Capital Asset Market Value Tax Basis Holding Period L stock $50,000 $41,000 > 1 year M stock 28,000 39,000 > 1 year N stock 30,000 22,000 < 1 year O stock 26,000 33,000 < 1 year Antiques 7,000 4,000 > 1 year Rental home 300,000* 90,000 > 1 year *$30,000 of the gain is 25 percent gain (from accumulated depreciation on the property). Ignore the Net Investment Income Tax. a. Given that Ron and Anne have a taxable income of only $20,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2019 assuming they file a joint return?

Gross tax liability $ 29,080 Description Short-Term Long-Term 28% Long-Term 25% Long-Term 0/15/20%Stock N$8,000 Stock O$(7,000) Step 1:$1,000 Antiques $3,000 Unrecaptured §1250 Gain $30,000 Remaining Gain from Rental Property $180,000 Stock L $9,000 Stock M $(11,000)Step 2: $178,000 Steps 3(B): Go to step 6 Step 4 : Go to step 5 Step 5$1,000 $3,000 $30,000 $178,000 Ron and Anne's ordinary income will increase from $20,000 to $21,000 due to their $1,000 net short-term capital gain. Ron and Anne's gross tax liability of $29,080 is computed as follows: Amount and Type of IncomeApplicable RateTaxExplanation$19,400; ordinary10%$1,940$19,400 × 10%. The first $19,400 of Ron and Anne's $21,000 of ordinary income is taxed at 10% (see MFJ tax rate schedule for this and other computations).$1,600; ordinary12%$192$1,600 × 12%. Ron and Anne's remaining $1,600 of ordinary income ($21,000 - $19,400) is taxed at 12%.$30,000; 25% rate capital gain12%$3,600$30,000 × 12%. The 25% gains are taxed at the lower of Ron and Anne's marginal tax rate (12%) or 25%. In this case, the $30,000 of gains will be taxed at 12%.$3,000; 28% rate capital gains12%$360$3,000 × 12%. The 28% gains are taxed at the lower of Ron and Anne's marginal tax rate (12%) or 28%. In this case, the $3,000 of gains will be taxed at 12%.$24,750; 0/15/20% rate capital gains0%$0$24,750 × 0%. $24,750 ($78,750 - $21,000 ordinary income - $30,000 25% capital gain - $3,000 28% capital gain) of 0/15/20% rate capital gain fits into the remaining space below the maximum zero rate amount ($78,750), so it is taxed at 0%.$153,250; 0/15/20% rate capital gains15%$22,988$153,250 × 15%. All of the remaining $153,250 ($178,000 - $24,750) of 0/15/20% capital gain is taxed at 15% because Ron and Anne's taxable income (including the gains) is above the maximum zero rate amount ($78,750) and below the maximum 15-percent rate amount ($488,850).Gross tax liability $29,080

During the current year, Ron and Anne sold the following assets: (Use the dividends and capital gains tax rates and tax rate schedules.) Capital Asset Market Value Tax Basis Holding Period L stock $50,000 $41,000 > 1 year M stock 28,000 39,000 > 1 year N stock 30,000 22,000 < 1 year O stock 26,000 33,000 < 1 year Antiques 7,000 4,000 > 1 year Rental home 300,000* 90,000 > 1 year *$30,000 of the gain is 25 percent gain (from accumulated depreciation on the property).Ignore the Net Investment Income Tax. b. Given that Ron and Anne have taxable income of $400,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2019 assuming they file a joint return?

Gross tax liability $130,501 DescriptionShort-Term Long-Term 28% Long-Term 25% Long-Term 0/15/20%Stock N$8,000 Stock O$(7,000) Step 1:$1,000 Antiques $3,000 Unrecaptured §1250 Gain $30,000 Remaining Gain from Rental Property $180,000 Stock L $9,000 Stock M $(11,000)Step 2: $178,000 Steps 3(B): Go to step 6 Step 4 : Go to step 5 Step 5$1,000 $3,000 $30,000 $178,000 The netting process used to determine Ron and Anne's gross tax liability for the year is unchanged from the process used in part a. Ron and Anne's ordinary income will increase from $400,000 to $401,000 due to their $1,000 net short-term capital gain. Ron and Anne's gross tax liability of $130,501 is computed as follows: Amount and Type of IncomeApplicable RateTaxExplanation$19,400; ordinary10%$1,940$19,400 × 10%. The first $19,400 of Ron and Anne's $401,000 of ordinary income is taxed at 10% (see MFJ tax rate schedule for this and other computations).$59,550; ordinary12%$7,146$59,550 × 12%. The next $59,500 ($78,950 - $19,400) of Ron and Anne's $401,000 of ordinary income is taxed at 12%.$89,450; ordinary22%$19,679$89,450 × 22%. The next $89,450 ($168,400 - $78,950) of Ron and Anne's $401,000 of ordinary income is taxed at 22%.$153,050; ordinary24%$36,732The next $153,050 ($321,450 - $168,400) of Ron and Anne's $401,000 of ordinary income is taxed at 24%.$79,550; ordinary32%$25,456The remaining $79,550 ($401,000 - $321,450) of Ron and Anne's ordinary income is taxed at 32%.$87,850; 0/15/20% rate capital gains15%$13,178$87,850 × 15%. $87,850 ($488,850 - $401,000 ordinary income) of 0/15/20% rate capital gain fits below the maximum 15-percent rate amount ($488,850), so it is taxed at 15%.$90,150; 0/15/20% rate capital gains20%$18,030$90,150 × 20%. All of the remaining $90,150 ($178,000 - $87,850) of 0/15/20% capital gain pushes Ron and Anne's taxable income above the maximum 15-percent rate amount ($488,850) so it is taxed at 20%.$30,000; 25% rate capital gains25%$7,500$30,000 × 25%$3,000; 28% rate capital gains28%$840$3,000 × 28%Gross tax liability $130,501

Mickey and Jenny Porter file a joint tax return, and they itemize deductions. The Porters incur $2,000 in investment expenses. They also incur $3,000 of investment interest expense during the year. The Porters' income for the year consists of $150,000 in salary and $2,500 of interest income. a. What is the amount of the Porters' investment interest expense deduction for the year?

Investments interest expenses deduction $ 2,500 The $3,000 of investment interest expense is deductible to the extent of net investment income. Net investment income is $2,500 (the same as investment income) because there are no deductible investment expenses to reduce gross investment income. Consequently, $2,500 of the investment interest expense is deductible and $500 is carried forward to next year.

At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $50,000 from the secondary market for $45,000. The bond has a stated annual interest rate of 5 percent payable on June 30 and December 31, and it matures in five years on December 31. Absent any special tax elections, how much interest income will Eric report from the bond this year, and in the year the bond matures?

Interest income reported this year$2,500 Interest income reported in the year the bond matures$7,500 Accrued market discount on bonds is reported as interest income when the bonds are sold or mature. Therefore, Eric will only report the interest he actually receives or $2,500 [($50,000 × 0.025) × 2]. In the year the bond matures, he will again report $2,500 of interest income related to the semiannual interest payments received and an additional $5,000 of interest income related to the market discount on the bonds.

Mickey and Jenny Porter file a joint tax return, and they itemize deductions. The Porters incur $2,000 in investment expenses. They also incur $3,000 of investment interest expense during the year. The Porters' income for the year consists of $150,000 in salary and $2,500 of interest income. b. What would their investment interest expense deduction be if they also had a ($2,000) long-term capital loss?

Investment interest expense deduction $2,500 . If the Porters also have a $2,000 long-term capital loss, their net investment income remains $2,500 for purposes of determining the investment interest expense deduction. Capital losses are not included in the calculation of net investment income. Consequently, $2,500 of the investment interest expense is deductible and $500 is carried over to next year.

For 2019, Sherri has a short-term loss of $2,500 and a long-term loss of $4,750. b. How much loss will Sherri carry over to 2020, and what is the character of the loss carryover?

Long term capital loss $4,250 Individual taxpayers can offset $3,000 of capital loss against ordinary income, with short-term losses being offset first. Therefore, Sherri can deduct the $2,500 short-term capital loss and $500 of the long-term capital loss in 2019. The remaining $4,250 of the long-term capital loss (i.e. $4,750 less the $500 deducted currently) is carried forward indefinitely.

Sue has 5,000 shares of Sony stock that have an adjusted basis of $27,500. She sold the 5,000 shares of stock for cash of $10,000, and she also received a piece of land as part of the proceeds. The land was valued at $20,000 and had an adjusted basis to the buyer of $12,000. What is Sue's gain or loss on the sale of 5,000 shares of Sony stock?

Sue's gain $2,500 Sue's gain on the sale is $2,500, which is the amount realized of $30,000 ($10,000 + $20,000) less her adjusted basis of $27,500. Note that the value of the land is included in her amount realized along with the cash she received.

In 2019, Tom and Amanda Jackson (married filing jointly) have $200,000 of taxable income before considering the following events: (Use the dividends and capital gains tax rates and tax rate schedules.) On May 12, 2019, they sold a painting (art) for $110,000 that was inherited from Grandma on July 23, 2017. The fair market value on the date of Grandma's death was $90,000 and Grandma's adjusted basis of the painting was $25,000. They applied a long-term capital loss carryover from 2018 of $10,000. They recognized a $12,000 loss on the 11/1/2019 sale of bonds (acquired on 5/12/2009). They recognized a $4,000 gain on the 12/12/2019 sale of IBM stock (acquired on 2/5/2019). They recognized a $17,000 gain on the 10/17/2019 sale of rental property (the only §1231 transaction) of which $8,000 is reportable as gain subject to the 25 percent maximum rate and the remaining $9,000 is subject to the 0/15/20 percent maximum rates (the property was acquired on 8/2/2013). They recognized a $12,000 loss on the 12/20/2019 sale of bonds (acquired on 1/18/2019). They recognized a $7,000 gain on the 6/27/2019 sale of BH stock (acquired on 7/30/2010). They recognized an $11,000 loss on the 6/13/2019 sale of QuikCo stock (acquired on 3/20/2012). They received $500 of qualified dividends on 7/15/2019.After completing the required capital gains netting procedures, what will be the Jacksons' 2019 tax liability? (Do not round intermediate calculations.)

Total tax liability $37,144 ST LT 28% 25% 0/15/20%(d)$4,000 (a)$20,000 (e)$8,000 (c)$(12,000)(f) (12,000) (b) (10,000) (e) 9,000 (g) 7,000 (h) (11,000) (8,000) $10,000 $ 8,000 $(7,000) (7,000) 7,000 (8,000) $3,000 $ 8,000 $0 8,000 (3,000) (5,000) $0 $0 $3,000 $0 2019 Taxable Income:Taxable Income before the events$200,000Qual. Dividend 500LTCG 25% 3,000Taxable Inc$203,500 2019 Tax Liability:Ordinary Income:$28,765 + 24% × ($200,000 - $168,400)$36,349Capital Gains:*+ 24% × $3,000 25% gains 720Dividends:**+ 15% × $500 75Total tax liability$37,144 *The 25% gains are taxed at the lower of the marginal tax rate (24%) or the 25% maximum rate. Since the Jackson's have $121,450 ($321,450 - $200,000 ordinary income) remaining in the 24% bracket, the 25% gains are taxed at the lower marginal tax rate. **The qualified dividends are taxed at the 15 percent rate because taxable income fits between the maximum zero rate amount and the maximum 15-percent rate amount.