Income - Capital Gain or Loss

Form 1040 Line 13Pub 4012 Tab 2

Pub 17 Chapters 13-16

LEVEL 2, 3 TOPIC

4491-10 Income - Capital Gain or Loss v1.0 VO.ppt

11/30/2010 1NJ Training TY2010 v1.0

Stock Sales – Objectives

Determine the adjusted basis of stock Determine if the holding period is long-

term or short-term Calculate the taxable gain or deductible

loss

11/30/2010 2NJ Training TY2010 v1.0

Stock Sales – Schedule D

Key elements of stock sale When was it bought? When was it sold? What was the sales price? What was the cost basis?

Note: Use Tax Wise Capital Gain Worksheet for entering data for each transaction

11/30/2010 3NJ Training TY2010 v1.0

What information is needed?

Basis / adjusted basis Basis is the original cost of the asset Adjusted Basis is the original cost less commissions and

fees Holding period

Short-term is held one year or less Long-term is held more than 1 year

Proceeds from the sale Form 1099-B or broker’s Substitute 1099-B reflects

gross or net proceeds

11/30/2010 4NJ Training TY2010 v1.0

What is the basis of stock?

Usually its cost Need basis to calculate gain or loss Taxpayer must provide:

Broker’s cost basis worksheet Other records Can use zero if no tax effect

If taxpayer cannot provide basis: out of scope

11/30/2010 5NJ Training TY2010 v1.0

Adjusted Basis

Events can change share basis Stock splits

Buy 100 sh @ $10 per share, splits 2 for 1 Now have 200 sh @ $5 per share

Dividend reinvestments Buy additional shares at current price Example:

100 sh @ $10 5 sh @ $20 3 sh @ $18

11/30/2010 6NJ Training TY2010 v1.0

Sales Commissions

Commission paid will affect the basis If 1099-B reports sale as gross, commission will

be added to basis. If 1099-B reports sale as net, no adjustment to

basis is needed.

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Basis other than cost

Inherited Different in 2010 – Discussed later

Gift Out of scope

Taxpayer cannot provide information Out of scope

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Holding period

Holding period Starts day after purchase Ends day of sale

Short-term: 1 year or less Taxed at regular tax rates

Long-term: more than a year Taxed at capital gains rates

Inherited: Discussed later

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Holding period (continued)

Sale of shares bought on various dates at different prices (multiple blocks) If short-term, enter actual purchase dates If long-term, enter “VARIOUS” in TaxWise

Purchase Date column – total will be reported as long-term

11/30/2010 10NJ Training TY2010 v1.0

PROPERTY INHERITEDPRIOR TO 2010 Decedent died prior to 2010

Basis is Fair Market Value at time of death Gain is long term In TaxWise, enter “INHERIT” for the date

purchased

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PROPERTY INHERITEDIN 2010 Decedent died in 2010

Basis is lesser of: Decedent’s adjusted basis (in TaxWise, enter date

acquired by decedent – could be short- or long-term) OR

Fair Market Value (in TaxWise, enter date of death)

May require professional tax preparer

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What info do I need from 1099-B?

Sale date

Sale price

# of shares

Description

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Broker’s Substitute 1099-B

Date of Sale

Box 1a

Stocks,Bonds-ProceedsBox 2 (less commission)

Description

Box 7

Federal Income Tax WithheldBox 4

2-23-10 $ 2,100.00 20 shares Tractor Co. $0.00

5-01-10 $ 900.00 100 shares Car Co. $0.00

6-22-10 $14,000.00 500 shares Couch Co. $0.00

9-06-10 $ 2,000.00 25 shares Technology Co. $0.00

Substitute 1099-B

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Capital gain distributions

Reported to taxpayer on 1099-DIV Enter on 1099-DIV worksheet

If Sch D required, will flow to Sch D, then to 1040 line 13

If Sch D not required, will flow directly to 1040 line 13

11/30/2010 15NJ Training TY2010 v1.0

SCHEDULE K-1CAPITAL GAINS OR LOSSES In TaxWise, enter directly on Sch D (do NOT

fill out K-1) Short term – Line 5 Long term – Line 12 Direct entry provides proper tax treatment of

short or long term gains

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Tax Liability Net Loss

Net loss can offset all gains, plus Up to $3,000 can be used to reduce other

taxable income in the current year ($1,500 if MFS)

The amount in excess of $3,000 (or $1,500 if MFS) is carried forward to the next year

Note: Loss not allowed on NJ return11/30/2010 17NJ Training TY2010 v1.0

Capital Loss Carry Forward

Check prior year Schedule D or related worksheet to determine carryover loss

Carryover losses keep their short-term or long-term classification

Carryover losses are combined with the gains and losses that actually occur in the subsequent year

There is no limit to how many times a loss can be carried forward but the maximum loss (i.e. $3,000) must be used each year even if there is no tax liability to offset. If not used, the $3,000 deduction is lost

LEVEL 2 STOP HERE11/30/2010 18NJ Training TY2010 v1.0

CAPITAL GAINS QUIZ #1

The taxpayer paid $1,000 for 100 shares of XYZ stock.

What is his cost basis per share in XYZ?

$10 per share

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CAPITAL GAINS QUIZ #2

The taxpayer who paid $1,000 for 100 shares of XYZ stock received a 2 for 1 stock split.

What is his adjusted basis per share in XYZ?

$5 per share

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CAPITAL GAINS QUIZ #3

The taxpayer sells all 200 shares of XYZ stock receiving $7 per share minus a total commission of $15.

If the 1099B reports gross proceeds, what will be the sales price and the basis?

$1,400 selling price $1,015 cost basis (gain is $385)

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CAPITAL GAINS QUIZ #4

The taxpayer sells all 200 shares of XYZ stock receiving $7 per share less a total commission of $15.

If the 1099B reports net proceeds, what will be the sales price and the basis?

$1,385 selling price $1,000 basis (gain is still $385)

11/30/2010 22NJ Training TY2010 v1.0

Sale Of Home -- Objectives

Determine whether home is taxpayers main home

Determine if taxpayer meets the ownership and use tests

Determine when the 5-year ownership/use test period is suspended

LEVEL 3 TOPIC

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What is considered a “main” home? “Main” home is where the taxpayer lives

most of the time Only gain from the main home can be

excluded Must meet Ownership and Use tests Reduced exclusion is out of scope

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Ownership And Use Tests

Ownership Test: Owned by the taxpayer for a combined period of at least 2 years out of the last 5 years, ending on the date of sale

AND

Use Test: Lived in home as the taxpayer’s main home for at least 2 years of that 5 year period

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Calculate Exclusion Single homeowner can exclude up to $250,000 of

gain from sale of main home Unmarried surviving spouse can exclude $500,000 if

sale occurs within 2 years of spouse’s death Married couple can exclude up to $500,000 of

gain, if: Filed a joint return Both individuals meet the use test

If only one meets use test, refer to Pub 17 – Sale of Home Either or both meet the ownership test Neither individual excluded gain in the 2 years before

the current sale

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Gain (or loss) from sale of home

Selling price includes total amount received Amount realized is selling price minus selling

expenses Basis:

Bought or built – actual cost Inherited – fair market value at date of death

Except if Inherited in 2010 – treat like other stocks Adjusted basis (add major improvements) Gain/loss is amount realized minus adjusted

basis11/30/2010 27NJ Training TY2010 v1.0

Where do I report gain (or loss)?

No taxable gain, no report Loss on personal property is not deductible Report taxable gain on Schedule D

11/30/2010 28NJ Training TY2010 v1.0

Sale of Home Quiz #1

Irving and Martha bought their home in 1970 for $20,000

They added a garage in 1985 at a cost of $30,000

Three years ago they put in new carpets for a cost of $6,000

They sold the house for $555,000 in 2010 What is their gain and how much can be

excluded?

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Sale of Home Quiz #1Answers Gain = $505,000

Sale for $555,000 Cost Basis = $50,00 ($20,000 + $30,000)

$6,000 for carpet NOT includable

Exclusion = $500,000 Net Gain on taxes is $5,000

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Sale of Home Quiz #2 Francis lived in home #1 as renter starting in

2006 for 2 years Francis moved to home #2 in 2008 and has

lived there ever since Later in 2008 Francis bought home #1 and let

her sister live there (no rent, etc.) Francis sold home #1 in 2010 after owning it

for 2 years Can Francis take the exclusion for this sale?

Answer: Yes!11/30/2010 31NJ Training TY2010 v1.0

SALE OF HOME QUIZ #3

John purchased a condo in 2002 and lived in it until 2008

Jane was divorced in 2004 and has lived in her home since

John and Jane married in 2008 and began living together in her home

John sold his condo in 2010 for a $300,000 gain

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SALE OF HOME QUIZ #3ANSWERS Does John qualify to exclude the gain if MFJ?

Ownership test - yes, owned since 2002 Use test - was not Jane’s main home for 2

years during 5 years preceding sale, so she does NOT meet the Use test.

Looking in Pub 17 (Sale of Home, Married Persons), we see that they can only exclude up to $250,000

11/30/2010 33NJ Training TY2010 v1.0

CANCELLATION OF DEBT

OUT-OF-SCOPE except Counselors may obtain special online

training and certification to work with Cancellation of Debt (COD)

Mortgage forgiveness debt (foreclosure) is no longer in Advanced certification – needs this special COD certification

11/30/2010 34NJ Training TY2010 v1.0