A taxpayer had the following in the current year: Wages $40,000; Net Short-Term Capital Gain $2,000; Net Long-Term Capital Gain $5,000. What is the taxpayer's total taxable capital gain included in Adjusted Gross Income?

Answer options:

$2,000

$5,000

$7,000

How to approach this question

Distinguish between 'Inclusion in AGI' (100%) and 'Tax Rate' (Preferential).

Full Answer

C.$7,000✓ Correct

All recognized capital gains (short-term and long-term) are included in gross income and AGI. The preferential tax rates for LTCG apply during the tax computation phase, but the full amount is part of AGI. Total = $2,000 + $5,000 = $7,000.

Common mistakes

Thinking LTCG is excluded from income (it's just taxed at a lower rate).

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