Capital Gains and Losses Part 1 (Wash Sales & Related-Party Transactions)
Taxpayer purchased (more than 1 year ago) 500 shares of Merck for $45.07 a share or $22,535. The shares are sold for $22.87 a share ($11,435) on November 3, 2018. The recognized loss is $11,100. Taxpayer sold another stock earlier in the year for a $5,000 long-term capital gain. (If the stock gain was the only transaction for the year, the extra tax would be $5,000 x 15% or $750.)
"Tax Harvesting" Use the $11,100 loss to erase the $5,000 gain. The taxpayer is left with a $6,100 capital loss. Assuming that the taxpayer has no other stock transactions, he/she can take a $3,000 deduction for 2018. The $3,100 excess loss ($6,100-$3,000) can be carried forward to 2019. If the taxpayer is in the 35% tax bracket ... the $3,000 loss will reduce taxes by $1,050. ($3,000 x .35) The total 2018 tax reduction is: $1,050 + $750 = $1,800 (the true savings)
A donor can give up to how much per year (2018) to as many donees as they choose?
$15K
2018 Qualified Dividends and LTCG Rates
0% 15% 20% "preferential tax rates"
Long-Term Capital Gain
Greater than 1 year holding period (A year + 1 day) The first day is the day after you get the stock
Steps to capital transactions
Step 1: Organize the transactions Step 2: Group the transactions as Long-Term and Short-Term Step 3: Any carryovers? If yes, plug in the amounts.
A married couple has a salary of $75,000. They sell their principal residence (they have owned and used it for the last 10 years). The sales price is $1,300,000. The adjusted basis in the home is $700,000. The $600,000 in realized gain is offset by the $500,000 exclusion. $100,000 is the recognized gain. Assume that the couple has $125,000 of additional Net Investment Income.
$125,000 + $100,000 = $225,000 (NII) The couple's Modified Adjusted Income is $300,000 = Salary ($75,000) + Net Investment Income ($225,000) Threshold for a married couple filing jointly is $250,000. 3.8% Medicare surtax on lower of $225,000 or $50,000 ($300,000 - $250,000 floor) 3.8% of $50,000 = $1,900.
How much can parents give to each of their grandchildren, friends, neighbors, former profs, current profs, etc.?
$30K to each
Federal Estate Tax Rules Exempted Amount in 2018?
$5,600,000
Married couple $400,000 of taxable income and $100,000 of LTCGs and Qualified Dividends.
$70,700 out of $100,000 gets taxed at 15%. $29,300 ($100,000 - $70,700) is taxed at 20%.
Mary sells 1,000 shares of MCD at $80.00 a share and pays a commission of $130. What is Mary's gain? Her basis of purchase was $76,110
$80,000 - $130 = $79,870 basis of sale basis of sale - basis of purchase = $79,870 - $76,110 = $3,760
A donation of appreciated stock results in:
-A full deduction of the FMV of the stock. -No Capital Gains Tax -Charity does not pay a Capital Gains when it sells the stock.
Capital assets are not directly defined in the Code but they are property held by the taxpayer. Section 1221(a) defines what is not a capital asset. These are:
-Inventory -Receivables -Depreciable property or real estate used in a business -Certain copyrights; literary, musical, or artistic compositions; or letters, memoranda, or similar property
TCJA of 2017
-No substantive changes to the application of the Capital Gains and Losses Rules. -Holding period for Long-Term Capital Gains remains at greater than 1 year. -The limit on deducting qualifying Capital Losses remains at $3,000.
Most common Capital Assets are:
-Stocks, Bonds -Personal Residence and Furnishings -Personal Automobile -Personal Computer -Land held as an investment
The Mark to Market election would only work if:
-The taxpayer/s held the assets for > 5 years -The assets went up in value -Congress did not otherwise lower the Capital Gains tax rates
2018 LT Capital Gains Tax Brackets
0% - $0-$38,600 (single) and $0-$77,200 (MFJ) 15% - $38,601-$425,800 (single) and $77,201-$479,000 (MFJ) 20% - $425,801 and up (single) $479,001 and up (MFJ)
Most "middle-income" taxpayers pay a X% tax rate.
15%
Joe Hall owns a limousine for use in his personal service business of transporting passengers to airports. The limousine's adjusted basis is $40,000. In addition, Hall owns his personal residence and furnishings, that together cost him $280,000. Hall's Capital Assets amount to:
280K
Virginia tax rate on income from investments and dividends
5.75%
Mary buys 1,000 shares of MCD at $76.00 a share and pays a commission of $110. What is Mary's basis in the stock?
76,000 + $110 = $76,110 / 1,000 shares = $76.11 per share
Will taxpayers pay a federal estate tax?
A significant number will NOT
Taxpayer (single) has AGI of $225,000 and $11,000 of LTCG, how much medicare surtax does he have to pay?
Because the Taxpayer's AGI is >$200,000, he/she must pay the 3.8% surtax on the lesser of $11,000 (net investment income) or $25,000. .038 x $11,000 = $418
Loss on the sale of a residence
Capital Gains must be recognized on the sale of a residence (to the extent no excluded) but NO LOSS on sale of residence may offset any capital gain elsewhere, in current year or as a carry forward
If a Taxpayer is in the top 37% tax bracket ... > $600,000 or more Married-Joint > $500,000 or more Single What is the capital gains tax rate?
Capital Gains tax is 20% + 3.8% surtax* = 23.8%.
When a taxpayer sells shares of stock that have been purchased over time, determining the basis of the shares being sold is very important. Taxpayers are required to use which method by default?
FIFO Taxpayers can notify their broker that they prefer a different arrangement. This is referred to as the specific identification method.
Code Section 1211(b) provides that taxpayers who incur losses from the sale or exchange of capital assets shall be allowed to deduct these loses to the extent of:
Gains from the sale or exchange of assets, PLUS The LOWER of $3,000 or the excess loss over gains
Lets assume that Mom and Dad give $30,000 to their single daughter Julia. In what case would she have a 0% capital gains tax rate? What if she was married?
If Julia's regular income + the $30,000 gift is <$38,600. Julia can sell the stock and have a 0% Capital Gains tax rate. If Julia was married, the parents could give $60,000 to the couple. If the couple's regular income + the $60,000 gift was <$77,200, the couple would have a 0% Capital Gains tax rate.
Medicare contribution tax
If the Taxpayers AGI is >$250,000 (married filing jointly) or > $200,000 (filing single), the Taxpayer must pay an additional 3.8%. Tax imposed on the lesser of net investment or AGI in excess of the threshold amount (250,000/$200,000).
0% Capital Gains Tax Rate
In 2018, remaining in the 0% tax rate means keeping the sum of income and capital gains < $77,200 if married, filing joint and < $38,600 if filing single. Applies to individuals who are in the 10% and 15% marginal tax brackets.
State taxes related to capital gains
In addition to the Federal Capital Gains tax, taxpayers in most states (but not all) must pay a state income tax. Most states do not have a separate Capital Gains tax and the income from investments and dividends is taxed at the regular state income tax rates.
Carryovers of Capital Losses
Individuals may carry over Capital Losses to future years but never back! No limit on # of years to which a loss can be carried over and they retain their character.
What makes up Net Investment Income? (for the 3.8% medicare surtax on NII)
Interest Dividends Capital Gains Stocks, bonds, mutual funds Investment real estate Sale of a residence not subject to the exclusion Rents Royalties
Long-Term Gain on the Sale of a Principal Residence
Long-Term Gain on the sale of a principal residence (after any exclusion amount*) is taxed at either 0%, 15% or 20% depending on the taxpayer's income. There may be an exclusion of up to $250,000/$500,000 IF certain conditions exist.
Can capital gains and losses be grouped with other gains and losses?
No -must be separated
Single taxpayer has a salary of $210,000 and sell his personal residence (he has owned and used it for the last 10 years). The adjusted basis in the home is $220,000 and the sales price is $420,000. Under Code section 121, the taxpayer may exclude the $200,000 realized gain on the sale of the residence (could have excluded up to $250,000). Does the Net Investment Income Tax apply to the gain on the sale of the residence?
No because it is excluded
Short-Term Capital Gain
One year or less
Assume that the taxpayer purchased $1,000 worth of ABC stock in January 2018 and sold it for $1,200 in June 2018. The taxpayer has a $200 Short-Term capital gain. The taxpayer and his/her spouse have taxable income of $85,000 (including the $200 of stock gain).
STCG Taxpayers in the 22% regular tax bracket. The taxpayers will give Uncle Sam $44 of the $200 recognized gain. $200 x .22 (Regular Tax Bracket Rate) = $44
Schedule D
Schedule D is a process by which transactions are grouped as Long-Term or Short-Term. Gains and Loss are netting against each other as Long or Short.
How much capital loss in excess of gains can you write off by filing status?
Single taxpayers and married taxpayers filing jointly get to write off a $3,000 capital loss. Married filing separate = $1,500 capital loss limitation.
How are stock commissions paid by investors treated?
Taken as an adjustment to basis, give the investor/taxpayer credit for commissions paid at both ends of the transactions
Net Short-Term Gains
Taxed as ordinary income, do not receive preferential tax treatment
Married couple with $480,000 of taxable income and $100,000 LTCGs and Qualified Dividends.
The entire $100,000 of LTCGs and Qualified Dividends are taxed at 20%
Single taxpayer with $150,000 salary for 2018. In addition, the taxpayer has $75,000 in Net Investment Income.
The taxpayer's Modified Adjusted Gross Income ($225,000)= Salary ($150,000) + New Investment Income ($75,000). 3.8% threshold for a single taxpayer is $200,000. The 3.8% Medicare surtax is applied to the lesser of $75,000 or $25,000 ($225,000 - $200,000). 3.8% of $25,000 = $950
Assume that the taxpayer purchased $1,000 worth of ABC stock in January 2018 and sold it for $1,200 after holding it for >1 year. The taxpayer has a $200 LONG-TERM capital gain. The taxpayer and his/her spouse have taxable income of $85,000 (including the $200 of stock gain).
The taxpayers are in the 15% capital gains tax bracket. The capital gains tax is $30. $200 x .15 (Capital Gains Tax Rate) = $30
Before 2013, there were how many capital gains rates for assets > 1 year?
Two
What types of income are NOT investment income?
Wages Unemployment compensation Social Security Benefits Alimony Tax-Exempt Interest Self-Employment Income *Alaska Permanent Fund Dividends (Residents of Alaska are paid to live there, so it does not count as investment income)
Kevin is single and has $100,000 of Taxable Income. Calculate Kevin's federal income tax.
With $100,000 of taxable income, Kevin falls in the $82,500-$157,500 range. This range exposes Kevin to a 24% tax rate on the difference between $100,000 - $82,500. The difference is $17,500 x .24 = $4,200. The federal income tax rate on income in that bracket is $14,089.50. Kevin's total federal income tax = $14,089.50 + $4,200 = $18,289.50. In the end, Kevin's income has effectively been taxed at different tax rates. Kevin's "effective" tax rate is 18%. ($18,289.50/$100,000.
Can musicians treat the sale of their creative works as a sale of Capital Assets?
Yes
Gain/loss
the difference between the amount realized on the disposition and the adjusted basis of the asset/s disposed of.
On a joint tax return, the capital gains and losses of a husband and wife are treated as ...
the gains and losses of an individual taxpayer