Scenarios regarding capital gain tax
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1. Betty incurs the following transactions during the current year. Without considering the
transactions, her 2006 AGI is $40,000. Analyze the transactions and answer the following
questions:
? On March 10, 2006, she sells a painting for $2,000. Betty is the artist, and she completed
the painting in 2001. Her basis for the painting is $50.
? On June 18, 2006, she receives $28,500 from the sale of stock purchased by her uncle
in 1996 for $10,000, which she inherits on February 20, 2006, as a result of her
uncle's death. The stock's FMV on that date is $30,000.
? On July 30, 2006, she sells land for $25,000 that was received as a gift from her
brother on April 8, 2006, when the land's FMV was $30,000. Her brother purchased
the land for $43,000 on October 12, 1998. No gift tax was paid.
a. What is her NSTCL or NSTCG?
b. What is her NLTCL or NLTCG?
c. What is the effect of capital gains and losses on her AGI?
d. What is her capital loss carryforward to 2007?
2. As a political consultant for an aspiring politician, you have been hired to evaluate the
following statements that pertain to capital gains and losses. Evaluate the statement and
provide at least a one-paragraph explanation of each statement. As you prepare your
answer, consider the fact that the aspiring politician does not have much knowledge
about taxation.
a. The tax on capital gains is considered a voluntary tax.
b. On October 22, 1986, the Tax Reform Act of 1986 was passed, which eliminated the
60% of net capital gain deduction (i.e., an individual taxpayer with $10,000 of net
capital gain was entitled to a $6,000 deduction when computing AGI) before January
1, 1987. Many state governments enjoyed a substantial increase in 1986 tax revenue.
c. High-income taxpayers receive the most benefit from preferential treatment for capital
gains.
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Solution Summary
The solution analyzes the capital gain transactions for Betty and then categorizes them. Basis in gift and inherited items are discussed. A full paragraph is presented for each of the capital gain tax questions in Question 2 including examples, as appropriate.
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1. First some notes about the items:
? The $1950 gain on the painting is long term but at the collectible rate of 28%.
? The inherited stock will show a long term loss of $1500. She uses his acquisition date to determine the holding period but she gets the stepped up basis as of the date of death for her basis. $28,500 - 30,000 = $1500 loss
? The recipient of a gift takes both the acquisition date and basis of the donor. She will report a sale of land for $25,000 - basis of $43,000 = $18,000 loss. It is long term.
a. She has no NSTCL and no NSTCG.
b. She has a NLTCL of 1500 + 18000 - 1950 = $17,550, but no NLTCG
c. Capital gains are fully reportable, but capital losses are limited to $3,000 per year; the unused balance is carried forward. AGI will be reduced by $3,000 only in the current year.
d. Her carryforward loss will be 17,500 - 3,000 = 14,500. I did view the Schedule D instructions to be certain that the collectible gain would not ...
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