Question

Jane and Blair are married taxpayers filing jointly and have 2018 taxable income of $107,000. The taxable income includes $5,000 of gain from a capital asset held five years, $2,100 of gain from a capital asset held seven months, and $13,000 of gain from a capital asset held four years. All of the capital assets were stock in publicly traded corporations. Jane and Blair also have qualified dividend income of $3,000.

Indicate whether the following items are subject to the alternative tax computation. Select "Yes" if subject to the alternative tax computation; otherwise select "No".

a.	$5,000 of gain from a capital asset held five years ___
b.	$13,000 of gain from a capital asset held four years ___
c.	$3,000 of qualified dividend income ___
d.	$2,100 of gain from a capital asset held seven months ___

The couple's tax on taxable income using the alternative tax calculations is $_____.

The related tax savings from the alternative tax computation is $_____.

Answer 1

Solution: Yes! Items are subjects to alternative tax computation.

First we should calculate their ordinary income and long-term capital gain.

ordinary income = ($107,000 - 5,000 - 13,000 - 3,000) = $86,000

Long-term capital gain (including qualified dividend) = $5,000 + 13,000 + 3,000 = $21,000

note: short-term capital gain of $2,100 will be taxed as per ordinary income tax rates.

Tax components	Tax	Computation
Tax on ordinary income	$3,150	$21,000*15%
Tax on LTCG	$10,799	$8,907 + ($86,000-77,400)*22%
Total tax liability	$13,949

The couple's tax on taxable income using the alternative tax calculations is = $13,949

The related tax savings from the alternative tax computation is = Tax without alt. tax calculation - current tax

= [$8,907 + (107,000-77,400)*22%] - $13,949

= $15,419 - 13,949 = $1,470

Note: Tax table is here;