Steve and Jennifer Are in the 33% Tax Bracket for Ordinary

question 141

Essay

Steve and Jennifer are in the 33% tax bracket for ordinary income and the 15% bracket for capital gains.They have owned several blocks of stock for many years.They are considering the sale of two blocks of stock.The sale of one would produce a gain of $12,000 while the sale of the other would produce a loss of $18,000.For purposes of this problem,ignore personal exemptions,itemized deductions,phase-outs and additional investment taxes.They have no other gains and losses this year.
a.How much tax will they save if they sell the block of stock that produces a loss?
b.How much additional tax will they pay if they sell the block of stock that produces a gain?
c.What will be the impact on their taxes if they sell both blocks of stock?

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Definitions:

Preferred Stock

A class of ownership in a corporation with a fixed dividend that is paid before any dividends are paid to common stockholders, typically without voting rights.

Common Stock

Shares of ownership in a corporation, giving holders voting rights and a share in the company's profits through dividends, subject to business performance.

Claim on Assets

Legal rights or interests that creditors and shareholders have on a company’s assets, usually in the event of the company's liquidation.

Fixed Dividend

A specified amount of money paid regularly by a company to its shareholders out of its profits or reserves.