Archive for the ‘mutual funds’ Tag

Back to Basics – Part VIII – Schedule D

Originally published in the Cedar Street Times

January 23, 2015

Imagine yourself on Antiques Roadshow and they tell you that an old porcelain mug you found in your attic last summer is worth $8,000-$10,000 dollars!  You are of course elated, and decide to sell the mug.  Fast forward to February, and your accountant starts asking you questions about this sale, such as your adjusted cost basis and your holding period.  You really have no idea how you even got it.  You know it was in the family for a long time, and you think that maybe it was in a box of things your mom left for you when she moved to Palm Springs where she now resides.  What do you do?  I don’t know exactly, but I know this much – it will go on your Schedule D in some form.

In this issue, we are discussing Schedule D – Capital Gains and Losses.  Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.

Schedule D is used to report gains or losses from the sale or exchange of capital assets.  Capital assets consist of a variety of things.  The personal use items you own – such as your home, your vehicles, household items etc. are capital assets.  Gains from the sale of personal items are taxed.  Losses, however, are generally disallowed. Your personal investments such as stocks, bonds, or real property held as an investment are also capital assets.  Gains and losses are allowed on personal investments.

The same types of items used in your trade or business, however, would be reported on a Form 4797 and would be taxed differently as well.

Assets that have a mix of personal use and business use can have elements reported on both forms.

To determine your gain or loss on a capital asset, you must know your cost basis in it.  If it is something you bought, your cost basis is generally the amount you paid for it; if it is something you inherited, your cost basis is often the fair market value at the date of death; or if it was something given to you, your cost basis is generally the same as that of the prior owner.

There can also be adjustments to this basis, such as when you make improvements to your home – the money you spend would be an adjustment upwards.  Once you know your adjusted cost basis, you simply subtract it from the sales price to determine your gain or loss.  If you scrapped it, your sales price is zero.  Sometimes it can be quite challenging to determine the cost basis, especially if records no longer exist.  Technically, if you cannot prove your basis, the IRS can take the position that your basis is zero.  This could be very unfavorable, especially if you just sold a $10,000 mug with unknown origins!

It is also important to know the length of your “holding period.”  The date you purchase the property is generally the beginning of your holding period and the date you dispose of the property is the end of your holding period.  For property received as a gift, you include the holding period of the person who gave it to you.

If your holding period is over a year, it is subject to favorable long-term capital gains rates – basically a 15 percent federal rate for most people.  (Although it could be as low as zero percent or as high as 20 percent depending on your tax bracket and the amount of capital gains you have.  Also, collectible items you sell such as old coins or antique vehicles are taxed at a 28 percent rate.)  If your holding period for the asset is a year or less, it is considered a short-term holding and is taxed like ordinary income (a higher rate for most people).  Inherited property is always considered to have a long-term holding period.  California does not have a special rate for long-term holdings and treats all capital gains as ordinary income on its tax return.

As mentioned before, there is no deduction for losses on your personal use items.  You can, however, take a loss on your personal investments.  They would reduce any other capital gains, first, and then if there are still losses remaining, you can use $3,000 to offset any other type of income you have on your tax returns.  The rest would get carried over to future years.

The Schedule D itself is essentially a summary of capital gain and loss activity that are mostly determined by other forms that feed into the Schedule D.  Part I summarizes short-term gains and losses, and Part II summarizes long-term gains and losses.  Form 8949 is the main supporting form used in both of these sections.  It was added a few years ago after changes to broker cost basis reporting requirements occurred.  The Form 8949 sorts out long-term and short-term transactions for which cost basis is reported to the IRS and not reported to the IRS, and handles the actual transactional reporting.

Parts I and II also have areas were short-term and long-term gains can be reported from other forms such as installment agreements, business casualty and theft losses, like-kind exchanges, as well as pass through entities such as partnerships, S-corporations, estates, and trusts.  Long-term capital gains distributions from mutual funds on a 1099-DIV are reported in Part II.  (Short-term capital gains distributions from mutual funds are actually included as ordinary dividends on the 1099-DIV, and are reported on Schedule B instead.)  In addition, short-term and long-term loss carryovers from prior years are added into their respective parts on Schedule D.

Part III nets the short-term gains or losses against the long-term gains or losses.  It then helps you determine the gain or loss to enter on the 1040.  It also walks you through several worksheets to determine the amount of tax and tax rates you will pay on any gains.

So what would you do about the mug?  Hopefully mom would have some recollection of the history.  Maybe there was a somewhat recent time when it was passed by inheritance and would have received a step-up in basis.  Of course, you should have figured that out before you sold it, and then had an appraisal done to support it!  Otherwise, if it had just been gifted from one person to the next, the mug probably had very little if any cost basis, and you might be stuck with a big taxable gain.

In two weeks we will discuss Schedule E – Supplemental Income and Loss.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Why You Should Donate Appreciated Assets Instead of Cash

Originally published in the Pacific Grove Hometown Bulletin

March 7, 2012

Last issue I spoke about the issues surrounding charitable deductions for donated goods or services.  I mentioned at the end of the article a much better way of making donations rather than through the contribution of goods, services, or even cash – that way is through  the donation of appreciated assets.  I will use stock in my explanation below, but keep in mind this same principal generally applies to any appreciated assets including mutual funds, real estate, art work, collectibles, etc.

The donation of appreciated assets, such as stock, is an incredible tool if you 1) have some, or 2) can plan to have some for donations down the road!  Donating appreciated stock is like having your cake and eating it too: you basically get two tax benefits.  Here is how it works.  Let us assume you buy $1,000 of stock, and over time, and after a treacherous dip to $400 (!), it rebounds and climbs to $1,500.  Then let us assume your favorite charitable organizations need funds.  You could sell that $1,500 of stock and give the cash proceeds to the organization.  You would  get a $1,500 charitable donation, but you would also have a taxable gain of $500 ($1,500 sales price less $1,000 cost) since you sold the stock.

Instead of selling the stock, let us assume you transferred the stock in-kind to the charitable organization.  You still get the $1,500 charitable donation but you do not have to pay any tax on the built-in-gains of $500.   This could be a huge benefit, especially if you have stock that has appreciated substantially over many years.  You would be much better off making your charitable contributions in this manner, rather than writing checks.

For those with no appreciated stock, long-term planning might suggest opening a separate brokerage account and investing money each year in growth stocks to be used in the future for making donations in lieu of your less favorable cash.  This may take a number of years to achieve, but eventually you could turn the tables and find yourself making your larger donations in appreciated stock, saving you even more tax.

Keep in mind, if you plan to donate something other than financial assets that have a readily determinable value, you would typically need an appraisal if the value is over $5,000.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.