Fundamentals of Financial Management (Concise 6th Edition)

Chapter 3 Financial Statements, Cash Flow, and Taxes 71

the asset for less than one year, you will have a short-term gain or loss, while if
you held it for more than a year, you will have a long-term gain or loss. Thus,
if you buy 100 shares of Disney stock for $42 per share and sell it for $52 per
share, you make a capital gain of 100 $ $10, or $1,000. However, if you sell the
stock for $32 per share, you will have a $1,000 capital loss. Depending on how
long you hold the stock, you will have a short-term or long-term gain or loss.^15
If you sell the stock for exactly $42 per share, you make neither a gain nor a loss;
so no tax is due.
A short-term capital gain is added to such ordinary income as wages and
interest, then is taxed at the same rate as ordinary income. However, long-term
capital gains are taxed differently. The top rate on long-term gains in 2008 is 15%.
Thus, if in 2008, you were in the 35% tax bracket, any short-term gains you earned
would be taxed just like ordinary income; but your long-term gains would be
taxed at 15%. Thus, capital gains on assets held for more than 12 months are better
than ordinary income for many people because the tax bite is smaller. However,

SINGLE INDIVIDUALS

If Your Taxable Income Is

You Pay This

Amount on the

Base of the Bracket

Plus This Percentage

on the Excess over the

Base (Marginal Rate)

Average Tax Rate
at Top of Bracket
Up to $7,825 $ 0 10.0% 10.0%
$7,825–$31,850 782.50 15.0 13.8
$31,850–$77,100 4,386.25 25.0 20.4
$77,100–$160,850 15,698.75 28.0 24.3
$160,850–$349,700 39,148.75 33.0 29.0
Over $349,700 101,469.25 35.0 35.0

MARRIED COUPLES FILING JOINT RETURNS

If Your Taxable Income Is

You Pay This

Amount on the

Base of the Bracket

Plus This Percentage

on the Excess over the

Base (Marginal Rate)

Average Tax Rate
at Top of Bracket
Up to $15,650 $ 0 10.0% 10.0%
$15,650–$63,700 1,565.00 15.0 13.8
$63,700–$128,500 8,772.50 25.0 19.4
$128,500–$195,850 24,972.50 28.0 22.4
$195,850–$349,700 43,830.50 33.0 27.0
Over $349,700 94,601.00 35.0 35.0

Notes:
a. These are the tax rates as of April 2008. The income ranges at which each tax rate takes effect are indexed with inflation, so they change
each year.
b. The average tax rates are always below the marginal rates, but the average at the top of the brackets approaches 35% as taxable income rises
without limit.
c. In 2007, a personal exemption of $3,400 per person or dependent could be deducted from gross income to determine taxable income. Thus, a
husband and wife with two children would have a 2007 exemption of 4 $ $3,400 = $13,600. The exemption increases with inflation; but if gross
income exceeds certain limits, the exemption is phased out, which has the effect of raising the effective tax rate on incomes over the specified
limit. In addition, taxpayers can claim itemized deductions for charitable contributions and certain other items, but these deductions are also
phased out for high-income taxpayers. In addition, there are Social Security and Medicare taxes. All of this pushes the effective tax rate to well
above 35%.

Tabl e 3 - 5 Individual Tax Rates in April 2008

(^15) If you have a net capital loss (your capital losses exceed your capital gains) for the year, you can deduct up
to $3,000 of this loss against your other income (for example, salary, interest, and dividends).