Section 121 Exclusion,
(gains on sale of principal residence)
8.5 points max, 7.25 points for good work
1. John is single, earns $210,000 and takes the standard deduction. His tax liability is as $44,612.50, calculated as follows
Adjusted gross income = $210,000
• Minus: standard deduction = $12,200
Taxable Income = 197,800
• Times: Tax rates = 9700 times .10 = 970
(39475-9700) times .12 = 3573
(84200-39475) times .22 = 9839.5
(160725-84200) times .24 = 18366
(197,800-160725) times .32 = 11864
Equals: Income Tax Liability = $44,612.5
Part 1 is just the facts, no requirements.
2. (0.5pts) Now assume that in addition to the above information, John sold the only principle residence he has ever owned (purchased for $500,000 in 2010) for $900,000, i.e. for an unadjusted gain of $400,000. Part of this gain is excludable under Section 121. Indicate how much is excludable and why? https://www.irs.gov/taxtopics/tc701
3. (2pts) Complete and attach Form 8949 very carefully. To be a tax professional, you will need to independently find forms and instructions. I guide you, but ask you to read the instructions carefully. Google the instructions for Form 8949, and read particularly the instructions for columns f and g. Attach Form 8949.
4. (0.5) What is the unexcluded gain from form 8949?
5. (0.5) Please complete and attach page 1 of Schedule D.
6. (3.7 pts) Form 1040 is optional. Complete the table below
(0.5) AGI (Show calculations)
(0.1) Taxable Income (after standard deduction, show calculation)
(0.1) Taxable ordinary income
(0.3) Marginal tax rate on ordinary income – we discussed this in Zoom
(0.1) Taxable capital gains (your answer to 4 above)
(0.1) Tax on ordinary income (see solution in part 1 above)
(0.5) Tax rate (%) on capital gains (from capital gains table of your choice in 6 below, based on total taxable income, including capital gains)
(0.5) Tax on capital gains (show calculation)
(0.5) Total tax (tax on ordinary income + tax on capital gains)
(0.5) Effective tax on gain of principal residence (show calculation: capital gains tax / unadjusted gain before exclusion)
(0.5) Effective tax rate on ordinary income (tax on ordinary income / $210,000
6. (0.3) Show table you used for capital gains
7. (1) Comment on what you have learned. You should include, but not limit, your answer to a discussion of the marginal and effective rates on ordinary income and capital gains. You are only eligible for “comment” credit if parts 2-6 are perfect.
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