1) We know that long-term capital gains are subject to preferential tax rates (i
ID: 1195001 • Letter: 1
Question
1) We know that long-term capital gains are subject to preferential tax rates (i.e., 0%, 15%, or 20%). Please explain why the Congress allows it.
2)Tad Trumbell is married and attending State University. Tad and Mary have one child. Mary worked to help put Tad through school. The child, who is four years old, is kept at a day care school. Tad paid the school $3,500 this year to keep the child. Tad and Mary had income of $14,000 this year, all of which was earned by Mary. Assuming Tad attends school for 12 months, what amount may Tad and Mary claim as a child care credit (Ignore the income tax limitation.)?
3)Maria and Tony are married. They are preparing to file their 2015 tax return. If they were to file as single taxpayers, Maria and Tony would report $10,000 and $70,000 of taxable income, respectively. On their joint tax return, their taxable income is $80,000. How much of a marriage penalty or benefit will Maria and Tony experience in 2015?
4)In 2015, Athena reported $37,500 of taxable income. Of this, $32,500 came from her work at the local library and the remaining $5,000 was from capital gains to be taxed at preferential rates. Compute her tax liability for 2015 as a single taxpayer.
5)Harmony was self-employed for the first half of 2015, earning $18,000 of Schedule C (business) net income. During the second half of the year, she began working as an employee and earned $38,000 in salary. What amount of self-employment taxes is Harmony required to pay? (Round to the nearest whole dollar).
Wolfina's twins, Romulus and Remus, finished their first year of school at an accredited university in 2015. She paid $10,000 in qualified educational expenses for Romulus and $2,000 of qualifying expenses for Remus. Wolfina is a head of household with an AGI of $85,000. What amount of American opportunity credit may she claim?
Explanation / Answer
Q.1. On all net capital gains, individual and companies are liable to pay federal tax in U.S. The amount an investor is taxed depends on both his or her tax bracket, and the amount of time the investment was held before being sold. For qualified dividend and long-term capital gain Tax rate is 0% for the 10%–15% brackets; 15% for the 25%–35% brackets; and 20% for the 39.6% bracket.
Preferential tax rates apply to gains on the sale of certain capital assets (e.g., capital assets held for more than one year). There are few reasons and rationale for which Congress has allowed such thing. Among other things, important ones include that these preferential rates are meant to encourage taxpayers to invest in those assets and to hold those assets for the long term. The government believes this will help the national economy by stimulating the demand for risky investments.
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