CH7HWIndividualTax

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School

North Seattle College *

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Course

255

Subject

Finance

Date

Feb 20, 2024

Type

pdf

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Uploaded by ElderSardinePerson218

During 2023, your clients, Mr. and Mrs. Howell, owned the following investment assets: Investment Assets Date Acquired Purchase Price Broker's Commission Paid at Time of Purchase 300 shares of IBM common (NYSE: IBM) 11/22/2020 $ 10,350 $ 100 200 shares of IBM common (NYSE: IBM) 4/3/2021 43,250 300 3,000 shares of Apple preferred (NASDAQ: AAPL) 12/12/2021 147,000 1,300 2,100 shares of Cisco common (NASDAQ: CSCO) 8/14/2022 52,500 550 420 shares of Vanguard mutual fund 3/2/2023 14,700 No-load fund* *No commissions are charged when no-load mutual funds are bought and sold. Because of the downturn in the stock market, Mr. and Mrs. Howell decided to sell most of their stocks and the mutual fund in 2023 and to reinvest in municipal bonds. The following investment assets were sold in 2023: Investment Assets Date Sold Sale Price Broker's Commission Paid at Time of Sale 300 shares of IBM common 5/6 $ 13,700 $ 100 3,000 shares of Apple preferred 10/5 221,400 2,000 2,100 shares of Cisco common 8/15 63,250 650 451 shares of Vanguard mutual fund 12/21 15,700 No-load fund* *No commissions are charged when no-load mutual funds are bought and sold. The Howells' broker issued them a Form 1099-B showing the sales proceeds net of the commissions paid. For example, the IBM sales proceeds were reported as $13,600 on the Form 1099-B they received. In addition to the sales reﬂected in the table above, the Howells provided you with the following additional information concerning 2023: ● The Howells received a Form 1099-B from the Vanguard mutual fund reporting a $900 long-term capital gain distribution. This distribution was reinvested in 31 additional Vanguard mutual fund shares on 6/30/2023. ● In 2017, Mrs. Howell loaned $6,000 to a friend who was starting a new multilevel marketing company called LD3. The friend declared bankruptcy in 2023, and Mrs. Howell has been notified she will not be receiving any repayment of the loan.

● The Howells have a $2,300 short-term capital loss carryover and a $4,800 long-term capital loss carryover from prior years. ● The Howells did not instruct their broker to sell any particular lot of IBM stock. ● The Howells earned $3,000 in municipal bond interest, $3,000 in interest from corporate bonds, and $4,000 in qualified dividends. ● Assume the Howells have $130,000 of wage income during the year. Use Form 8949 and page 1 of Schedule D to compute net long-term and short-term capital gains. Then, compute the Howells' tax liability for the year (ignoring the alternative minimum tax and any phase-out provisions) assuming they file a joint return, they have no dependents, they don't make any special tax elections, and their itemized deductions total $30,000. Assume that asset bases are reported to the IRS. Tax Liability for the year is $24,630. This is calculated by determining ordinary income of $103,000, which is $178,700 of taxable income minus $71,700 net long-term capital gain that will be taxed at 15 percent and minus $4,000 qualified dividends that will be taxed at 15 percent. The long-term capital gains and qualified dividends will be taxed at 15 percent because the Howell's taxable income falls between the maximum zero rate amount and the maximum 15-percent rate amount. The tax on $103,000 is $13,275 and the 15 percent tax on long-term capital gains and qualified dividends of $75,700 is $11,355. This results in a total 2023 tax liability of $24,630. 22,000 *.10 = 2200 67450 * .12 = 8094 13550 * .22 = 2981 2200+8094+2981 = 13,275 Assume the Howells' short-term capital loss carryover from prior years is $82,300 rather than $2,300 as indicated above. If this is the case, how much short-term and long-term capital loss carryovers remain to be carried beyond 2023 to future tax years? Short-term Capital Loss Carryover would be $5,300 and there would be no long-term loss carryover. If we assume the Howell’s short-term capital loss carryover into 2023 was $82,300 rather than $2,300 as originally assumed, a number of things change. First, the net short-term capital loss for the year increases to $88,200. When netted against the net long-term capital gain for the year of $79,900, a net short-term capital loss for the year of $8,300 remains. $3,000 of this loss can be used to reduce ordinary income, and the remaining $5,300 is a short-term capital loss carryover to future tax years.

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