Question 1. Betty incurs the following transactions during the current year. Without considering the transactions, her 2006 AGI is $40,000. Analyze the transactions and answer the following questions:
- On March 10, 2006, she sells a painting for $2,000. Betty is the artist, and she completed the painting in 2001. Her basis for the painting is $50.
- On June 18, 2006, she receives $28,500 from the sale of stock purchased by her uncle in 1996 for $10,000, which she inherits on February 20, 2006, as a result of her uncle's death. The stock's FMV on that date is $30,000.
- On July 30, 2006, she sells land for $25,000 that was received as a gift from her brother on April 8, 2006, when the land's FMV was $30,000. Her brother purchased the land for $43,000 on October 12, 1998. No gift tax was paid.
a. What is her NSTCL or NSTCG?
b. What is her NLTCL or NLTCG?
c. What is the effect of capital gains and losses on her AGI?
d. What is her capital loss carryforward to 2007?
Question 2. As a political consultant for an aspiring politician, you have been hired to evaluate the following statements that pertain to capital gains and losses. Evaluate the statement and provide at least a one-paragraph explanation of each statement. As you prepare your answer, consider the fact that the aspiring politician does not have much knowledge about taxation.
a. The tax on capital gains is considered a voluntary tax.
b. On October 22, 1986, the Tax Reform Act of 1986 was passed, which eliminated the 60% of net capital gain deduction (i.e., an individual taxpayer with $10,000 of net capital gain was entitled to a $6,000 deduction when computing AGI) before January 1, 1987. Many state governments enjoyed a substantial increase in 1986 tax revenue.
c. High-income taxpayers receive the most benefit from preferential treatment for capital gains.