Chapter 16 Investment and Personal Financial Planning

Computing net capital gains and losses  Net the gains and losses in each class (net ST, net LT)  If taxpayer has a net gain in one class and a net loss in the other, net those as well.  Otherwise, they remain separate.  Examples—taxpayer has following gains and losses: Example No.Long-termShort-termCombined 1Gains$40,000$15,000 No further netting Losses(10,000)(8,000) Net$30,000$7,000 2Gains$50,000$6,000 Net LTCG = $23,000 Losses(16,000)(17,000) Net$34,000($11,000)

Computing the Tax on Capital Gains and Losses  Net long-term capital gains taxed at following rates:  Net short-term capital gains taxed at ordinary rates Taxpayer’s marginal rate on taxable income ignoring preferential LTCG rate: Rate on NLTCG between 0-15%→0% between 25-35%→15% marginal rate = 39.6%→20% Unrecaptured Section 1250 gain (depreciation)→25% Collectibles (art, etc.)→28%

ExampleExample  Taxpayer, single filing status, has taxable income of $200,000, including $10,000 net short-term capital gain and $20,000 net long-term capital gain.  Marginal rate (2015) = 33%  Thus, LTCG rate = 20%  Tax calculation:  Ordinary income ($180,000)→$43,  net LTCG (20,000 * 20%)→ $ 4,  Total income tax liability→$47,471.25

Net Investment Income / Medicare Tax  Net Investment Income tax  Enacted as part of the Affordable Care Act  Is levied on net investment income : taxable interest income, dividends, annuities, royalties, rents, net capital gains, and net passive income  Tax Rate 3.8% (levied in addition to income tax)  Applies to MFJ taxpayers with AGI > $250K, Single individuals with AGI > $200K  Additional Medicare tax on wages and self employment income: 0.9% on wages / net self employment income. Thresholds same as above