Type The Correct Answer In The Box. Use Numerals Instead Of Words.Tasha Is A Single Taxpayer. She Has $ \$90,000 $ In Ordinary Taxable Income And $ \$12,000 $ In Capital Gains On An Investment She Held For Six Years.Use The Tables To
Understanding the Taxation of Ordinary Income and Capital Gains
As a single taxpayer, Tasha needs to understand the taxation of her ordinary income and capital gains. In this article, we will discuss the tax implications of ordinary income and capital gains, and how they are taxed differently.
Ordinary Taxable Income
Ordinary taxable income is the income that is subject to taxation under the tax laws of a country. It includes income from employment, self-employment, and other sources. In Tasha's case, she has $90,000 in ordinary taxable income.
Capital Gains
Capital gains are profits made from the sale of an investment or asset. In Tasha's case, she has $12,000 in capital gains from the sale of an investment she held for six years.
Taxation of Capital Gains
Capital gains are taxed differently than ordinary income. The tax rate on capital gains depends on the length of time the investment was held. If the investment was held for one year or less, the capital gain is considered short-term and is taxed as ordinary income. If the investment was held for more than one year, the capital gain is considered long-term and is taxed at a lower rate.
Tax Rates on Capital Gains
The tax rates on capital gains are as follows:
| Taxable Income | Tax Rate |
|---|---|
| $0 - $40,000 | 0% |
| $40,001 - $80,000 | 15% |
| $80,001 - $500,000 | 20% |
| $500,001 and above | 20% |
Taxation of Tasha's Capital Gains
In Tasha's case, she has $12,000 in capital gains from the sale of an investment she held for six years. Since the investment was held for more than one year, the capital gain is considered long-term and is taxed at a lower rate. Tasha's capital gains tax rate would be 15% if her ordinary taxable income is below $80,000.
Tax Calculation
To calculate Tasha's tax liability, we need to calculate the tax on her ordinary taxable income and her capital gains.
| Taxable Income | Tax Rate | Tax Liability |
|---|---|---|
| $90,000 | 24% | $21,600 |
| $12,000 | 15% | $1,800 |
Total Tax Liability
Tasha's total tax liability would be $21,600 + $1,800 = $23,400.
Conclusion
In conclusion, the taxation of ordinary income and capital gains is different. Capital gains are taxed at a lower rate than ordinary income, and the tax rate on capital gains depends on the length of time the investment was held. Tasha's tax liability would be $23,400, which includes tax on her ordinary taxable income and her capital gains.
Tables
| Taxable Income | Tax Rate |
|---|---|
| $0 - $40,000 | 0% |
| $40,001 - $80,000 | 15% |
| $80,001 - $500,000 | 20% |
| $500,001 and above | 20% |
| Taxable Income | Tax Liability |
| --- | --- |
| $90,000 | $21,600 |
| $12,000 | $1,800 |
References
- Internal Revenue Service. (2022). Publication 17: Your Federal Income Tax.
- Internal Revenue Service. (2022). Publication 550: Investment Income and Expenses.
Q: What is the difference between ordinary taxable income and capital gains?
A: Ordinary taxable income is the income that is subject to taxation under the tax laws of a country, including income from employment, self-employment, and other sources. Capital gains, on the other hand, are profits made from the sale of an investment or asset.
Q: How are capital gains taxed?
A: Capital gains are taxed differently than ordinary income. The tax rate on capital gains depends on the length of time the investment was held. If the investment was held for one year or less, the capital gain is considered short-term and is taxed as ordinary income. If the investment was held for more than one year, the capital gain is considered long-term and is taxed at a lower rate.
Q: What are the tax rates on capital gains?
A: The tax rates on capital gains are as follows:
| Taxable Income | Tax Rate |
|---|---|
| $0 - $40,000 | 0% |
| $40,001 - $80,000 | 15% |
| $80,001 - $500,000 | 20% |
| $500,001 and above | 20% |
Q: How is the tax on capital gains calculated?
A: The tax on capital gains is calculated by multiplying the capital gain by the applicable tax rate. For example, if Tasha has a capital gain of $12,000 and her tax rate is 15%, her tax liability would be $12,000 x 0.15 = $1,800.
Q: Can I deduct capital losses from my ordinary taxable income?
A: Yes, you can deduct capital losses from your ordinary taxable income. However, the deduction is limited to the amount of capital gains you have. If you have more capital losses than capital gains, you can deduct up to $3,000 of the excess loss against your ordinary taxable income.
Q: What is the wash sale rule?
A: The wash sale rule is a rule that prohibits you from selling a security at a loss and buying a "substantially identical" security within 30 days of the sale. If you violate the wash sale rule, you will not be able to deduct the loss.
Q: Can I defer capital gains tax?
A: Yes, you can defer capital gains tax by using a tax-deferred exchange, such as a 1031 exchange. This type of exchange allows you to exchange one investment property for another without paying capital gains tax.
Q: What is the impact of the Tax Cuts and Jobs Act (TCJA) on capital gains tax?
A: The TCJA reduced the tax rate on long-term capital gains to 0% for taxpayers in the 10% and 12% tax brackets. It also increased the threshold for the 20% tax rate on long-term capital gains to $500,001.
Q: Can I use a tax professional to help me with capital gains tax?
A: Yes, you can use a tax professional to help you with capital gains tax. A tax professional can help you navigate the complex rules and regulations surrounding capital gains tax and ensure that you are in compliance with the tax laws.
Conclusion
In conclusion, the taxation of ordinary income and capital gains is complex and requires a thorough understanding of the tax laws and regulations. By understanding the tax rates, tax calculation, and other rules and regulations surrounding capital gains tax, you can make informed decisions about your investments and minimize your tax liability.
References
- Internal Revenue Service. (2022). Publication 17: Your Federal Income Tax.
- Internal Revenue Service. (2022). Publication 550: Investment Income and Expenses.
- Tax Foundation. (2022). Tax Rates on Capital Gains.
- Kiplinger. (2022). Taxation of Capital Gains.