Mike and Jane Lewis, a married couple, file a joint 2014 federal income tax return showing $80,000 in gross income without regard to the following capital transactions:
Capital Loss Carryover from Prior Years: $0
Current-Year Net Long-Term Capital Gain or Loss: $5,000 loss
Current-Year Net Short-Term Capital Gain or Loss: $1,000 gain
Mike and Jane's total income will be increased/decreased by what amount as a result of the listed capital gains and losses?
A. $1,000 increase
B. $5,000 decrease
C. $4,000 decrease
D. $3,000 decrease
D is correct. I guess I was looking at it as $1,000 short-term gain increases total income to $81,000. Then the long-term capital loss offsets the $1,000 S/T gain plus $3,000, so a total of $4,000. The end result is $77,000 total income either way, so I can see why D is correct – just tricky wording (and some over-thinking on my part, I suppose).
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