To determine Mary’s capital gains tax rate and the tax owed, we need to consider her taxable income and the tax brackets for short-term capital gains. Short-term capital gains are taxed as ordinary income.
Given:
- Mary’s taxable income: \[tex]$40,000
- Short-term capital gains: \$[/tex]2,500
First, we should look at the income tax brackets to determine Mary’s tax rate on her income of \[tex]$40,000.
The income tax brackets for single taxpayers are:
- 10% for income from \$[/tex]0 to \[tex]$9,525
- 12% for income from \$[/tex]9,526 to \[tex]$38,700
- 22% for income from \$[/tex]38,701 to \[tex]$82,500
- 24% for income from \$[/tex]82,501 to \[tex]$157,500
- 32% for income from \$[/tex]157,501 to \[tex]$200,000
- 35% for income from \$[/tex]200,001 to \[tex]$500,000
- 37% for income over \$[/tex]500,000
Since Mary’s taxable income is \[tex]$40,000, she falls in the 22% tax bracket, which applies to income between \$[/tex]38,701 and \[tex]$82,500.
Therefore, Mary’s short-term capital gains are taxed at her ordinary income tax rate of 22%.
Next, we calculate the tax owed on Mary’s short-term capital gains:
\[ \text{Tax owed} = \text{Capital gains} \times \text{Tax rate} \]
\[ \text{Tax owed} = \$[/tex]2,500 \times 22\% \]
[tex]\[ \text{Tax owed} = \$2,500 \times 0.22 \][/tex]
[tex]\[ \text{Tax owed} = \$550 \][/tex]
Thus, the correct answer is:
C. 22% tax rate with \$550 in taxes owed.
