There are many tax rules and regulations you should be aware of when investing-whether it be in stocks; bonds; mutual funds; real estate; or collectibles such as artwork, antiques, gems, memorabilia, stamps, and coins. Capital gains are proceeds derived from these types of investments. Unless they are specified as being tax-free, such as municipal bonds, you must pay capital gains taxes on these proceeds. Capital gains are taxed in one of two ways. If the investment is held for one year or less, this is considered short-term and is taxed as ordinary income at your regular income tax rate. As this is written, if the investment is held for more than one year, it is considered long-term and qualifies for various tax discounts, as follows for single taxpayers with earnings as shown below. Stocks Held Capital Gains Rates Up to $38,700 $38,700–$426,700 Over $426,700 Over 1 year (long-term) 0% 15% 20% (a) If you are in the 25% tax bracket for ordinary income and have a 15% capital gains rate, how much tax will you save (in $) by waiting for an investment to become long-term before selling it if your taxable profit from this investment is $65,000? $ (b) How much will you save (in $) if you are in the 35% tax bracket for ordinary income and have a 20% capital gains rate? $

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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There are many tax rules and regulations you should be aware of when investing-whether it be in stocks; bonds; mutual funds; real estate; or collectibles such as artwork, antiques, gems, memorabilia, stamps, and coins. Capital gains are proceeds derived from these types of investments. Unless they are specified as being tax-free, such as municipal bonds, you must pay capital gains taxes on these proceeds.

Capital gains are taxed in one of two ways. If the investment is held for one year or less, this is considered short-term and is taxed as ordinary income at your regular income tax rate. As this is written, if the investment is held for more than one year, it is considered long-term and qualifies for various tax discounts, as follows for single taxpayers with earnings as shown below.

Stocks Held	Capital Gains Rates
Up to $38,700	$38,700–$426,700	Over $426,700
Over 1 year (long-term)	0%	15%	20%

(a)

If you are in the 25% tax bracket for ordinary income and have a 15% capital gains rate, how much tax will you save (in $) by waiting for an investment to become long-term before selling it if your taxable profit from this investment is $65,000?

(b)

How much will you save (in $) if you are in the 35% tax bracket for ordinary income and have a 20% capital gains rate?

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