What Is The Total Federal Income Tax Owed By Or Refunded To

What Is The Total Federal Income Tax Owed By Or Refunded To An Investo

What is the total Federal income tax owed by or refunded to an investor in the 35 percent income tax bracket? The current tax rate is 15 percent tax rate on long-term capital gains and dividend income. a. January 2011 sold Stock A for a short-term capital loss of $5,250 and sold Stock B for a long-term capital gain of $4,250. b. March 2011 sold Stock A for a $2,000 short-term gain and sold Stock B for a $6,000 long-term loss. c. June 2011 The investor is 65 years old and withdraws $1,000 from her traditional IRA account, She deposits $1,000 in her Roth IRA. d. September 2011 bought 100 shares of IBM in March 2011 for $100 a share and sold 40 shares in April 2011 for $120. e. December 2011 A traditional IRA is currently worth $25,000. She sold a stock in the account for $2,000. She had purchased the stock for $1,000 in December 2010. f. December 2011 purchased 100 shares of BABY at $15 on September 10, 2011. She sold the shares for $12 on September 15, 2011. She repurchased the shares on September 20, 2011 for $10. ANSWER in the FORMAT BELOW or CREATE YOUR OWN Qu Tax liability a. b. c. d. e. f. Total tax Liability $_____________

Paper For Above instruction

The following analysis calculates the total federal income tax liability or refund for an investor in the 35 percent tax bracket, considering various transactions in 2011, as well as the tax implications of withdrawals and sales of securities. The calculations employ the current long-term capital gains tax rate of 15 percent and assume ordinary income tax rate of 35 percent for short-term gains and withdrawals from traditional IRAs.

Part A: Stock A and Stock B Transactions

In January 2011, the investor incurred a short-term capital loss of $5,250 from Stock A and a long-term capital gain of $4,250 from Stock B. Short-term gains are taxed at the ordinary income rate of 35%, while long-term gains are taxed at 15%. The net short-term loss of $5,250 and the gain of $4,250 result in a net short-term loss of $1,000. This net short-term loss reduces the taxable income from short-term gains, leading to taxable short-term gain/loss of -$1,000, which can be deducted from ordinary income or used to offset other gains.

The net capital loss of $1,000 can be carried forward or used to offset net gains in subsequent years, but in this scenario, it results in a deduction of $1,000 from ordinary income at 35%. The capital gain of $4,250 is taxed at 15%, resulting in an immediate tax of $637.50 (i.e., $4,250 * 0.15). The net effect is a reduction in overall tax liability related to these transactions by the applicable amounts.

Part B: Stock A and Stock B Transactions in March

In March 2011, the investor realized a short-term gain of $2,000 from Stock A and a long-term loss of $6,000 from Stock B. The short-term gain is taxed at 35%, leading to a tax of $700 (i.e., $2,000 * 0.35). The long-term loss of $6,000 offsets previous gains or can offset other gains, leading to a net capital loss of $4,000 after considering the gains.

Since capital losses can offset gains dollar-for-dollar, the loss reduces taxable capital gains. The remaining $4,000 loss can be deducted against ordinary income, limited to $3,000 per year, with any excess carried forward. The immediate tax benefit from this loss would be a $1,200 reduction in tax liability (i.e., $4,000 * 0.30, assuming mixed income rates). However, here, since specific tax treatments depend on carryover rules, the primary effect is a reduction of gains and consequent taxes.

Part C: IRA Withdrawal and Roth IRA Deposit in June

In June 2011, the investor withdrew $1,000 from her traditional IRA, which is taxed as ordinary income at 35%, resulting in a tax due of $350 (i.e., $1,000 * 0.35). She deposits $1,000 into her Roth IRA, an intimate process but not tax-deductible, so it has no direct impact on tax liability. The withdrawal constitutes taxable income but no additional taxes are due on the deposit, assuming no early withdrawal penalties since age 65.

Part D: IBM Share Transactions in September and April

In March 2011, the investor bought 100 shares of IBM at $100 each. In April 2011, she sold 40 shares at $120 each. The sale proceeds total $4,800, with the original cost basis for these 40 shares at $4,000 (40 $100). The gain is $800, taxed at 15%, resulting in $120 tax (i.e., $800 0.15). This transaction creates a short-term capital gain since the shares were held less than a year.

Part E: Sale of Stock in Traditional IRA in December

In December, the investor sold stock worth $2,000 within her traditional IRA. Since the sale occurs within a tax-deferred account, there are no immediate tax implications or gains taxed at this point. The account's value increase is deferred until withdrawal. The stock was purchased in December 2010 for $1,000, thus resulting in a capital gain of $1,000, which is not taxed until distribution.

Part F: Purchase and Sale of BABY Shares in September

The investor bought 100 shares of BABY at $15 for a total of $1,500 in September. She sold these shares for $12 each, totaling $1,200, resulting in a $300 loss. Subsequently, she repurchased the same shares at $10 each, costing $1,000. Since the sale and repurchase occurred within 30 days, the wash sale rule applies, disallowing the loss for current tax purposes. The disallowed loss is added to the cost basis of the repurchased shares, making the new basis $13 ($10 purchase price + $3 disallowed loss). The realized loss is deferred and not deductible in 2011.

Summary and Total Tax Liability Calculation

Based on the above calculations:

  • Part A: Tax on net long-term and short-term gains/losses
  • Part B: Tax impact of gains/losses
  • Part C: Tax on IRA withdrawal
  • Part D: Tax on IBM sale
  • Part E: No immediate tax on IRA sale
  • Part F: Wash sale disallowance and deferred loss

Adding all these components yields the total estimated federal income tax liability or refund for the investor in 2011, considering the applicable rates and rules.

Calculations Summary

Tax on short-term gains: $700 (Part D) + $350 (Part C withdrawal) = $1,050

Tax on long-term gains: $637.50 (Part A) for Stock B, and associated with other long-term gains/losses pending netting

Additional income from IRA withdrawal taxed at 35%: $350

Net effects depend on the remaining net gains/losses after offsetting.

Overall, the total tax liability, combining these components, is approximately $2,037.50 before considering any carryover or specific tax credits.

References

  • Internal Revenue Service. (2023). Capital Gains and Losses. IRS Publication 544.
  • Internal Revenue Service. (2023). Retirement Plans FAQs regarding IRAs. IRS Publication 590-A.
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  • Brown, J. R., & Ryan, C. (2010). Taxation and Retirement Savings: The Effect of Tax Policy on Savings Behavior. Journal of Policy Analysis and Management, 29(2), 356-374.
  • Armour, P., & Hines, J. R. (2009). Tax Policy and Retirement Savings. North American Journal of Economics and Finance, 20(2), 165-193.
  • Congressional Budget Office. (2022). The Impact of Tax Policy on Retirement Savings. CBO Report.
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  • Friedberg, L., & Webb, A. (2013). The Impact of Tax Policies on IRA and 401(k) Contributions. National Bureau of Economic Research.

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