1. ©2015, College for Financial Planning, all rights reserved. Session 12 Capital Gains and Losses, and Investment Interest Expense CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

2. Session Details Module6 Chapter(s)3 and 4 LOs6-5 Analyze a situation to calculate the net capital gain or loss for a set of security transactions by an individual. 6-6 Analyze a situation to identify an income tax implication of a security transaction. 6-7 Analyze a situation to calculate the amount of investment interest expense that is deductible. 12-2

3. Capital Assets Defined by exception; all assets except: Inventory Depreciable and real property used in a trade or business Supplies regularly used or consumed in the taxpayer's trade or business A copyright; a literary or artistic composition; a letter, memorandum, or similar property held by the author or creator, or by donee Accounts or notes receivable acquired in the ordinary course of trade or business U.S. government publications 12-3

4. Net Capital Gain or Loss Net loss of $3,000 allowable per year Net LTCG taxed at: o 0% if gain is in 10% or 15% marginal rate o 15%, if gain falls into 25%-35% MITB o 20% if gain falls into 39.6% MITB Collectibles (maximum rate of 28%) o coins, stamps, artwork, etc. Depreciation on realty (unrecaptured §1250 income—maximum rate of 25%) Net STCG treated as ordinary income Netted in most favorable manner Capital loss on personal use assets-no deduction 12-4

5. LTCG—0% and 15% 12-5 Jim and Patty are married taxpayers filing jointly. They have $40,000 of ordinary income and $30,000 of net long-term capital gains from the sale of securities. They have only their two exemptions, and they claim the standard deduction. Sam and Sally are married taxpayers filing jointly. They have $40,000 of ordinary income and $60,000 of net long-term capital gains from the sale of securities. They have only their two exemptions, and they claim the standard deduction.

6. LTCG—15% and 20% Bob and Barb are married taxpayers filing jointly. They have $200,000 of ordinary income (after all deductions and exemptions) and $100,000 of net long-term capital gains from the sale of securities. Roy and Kathy are married taxpayers filing jointly. They have $200,000 of ordinary income (after all deductions and exemptions) and $400,000 of net long-term capital gains from the sale of securities. 12-6

7. Netting Capital Gains & Losses 12-7 Net short-term capital gains with short-term capital losses. Net long-term capital gains with long-term capital losses. If gain and loss, net again. If the result of Step 3 is a loss, the maximum allowed is the smaller of $3,000 or ordinary income. If there are short- and long- term gains, leave separate.

8. Basis in Mutual Fund Shares Average Cost Method Divides total cost of all shares by number of shares owned, resulting in all shares having same cost basis Gain or loss computed from sales proceeds of shares sold less average cost times shares sold First-In, First-Out (FIFO) Presumably lower-cost shares purchased first are used in computing gain or loss from sale Generally least advantageous method to investor 12-8

9. Basis in Mutual Fund Shares Specific Identification Investor identifies the particular shares that are being sold (by purchase date) Identifying highest cost basis shares results in lowest gain on sale Identifying lowest cost basis shares results in lowest loss on sale Stock sales must use specific identification 12-9

10. U.S. Securities Generally, no state or local income tax T-bills short-term sold at discount taxable at maturity Treasury Notes and Bonds interest taxable when received Treasury Inflation-Indexed Securities interest payments taxed when received inflation adjustments taxed in year of adjustment, although not paid until maturity 12-10

11. Wash Sale Rule Disallows (defers) loss if substantially identical securities purchased within 30 days before or after loss sale Basis of new securities increased by disallowed loss Holding period “tacked” Not substantially identical if different issuer or obligor Effect of Rev. Ruling 2008-5 12-11

12. Investment Interest Expense Investment interest expense: deductible up to amount of net investment income Investment interest expense: interest on debt incurred to purchase investments Investment income: primarily interest; LTCG and qualified dividends included only if taxpayer elects for preferential rates to not apply Net investment income: investment income reduced by other deductible investment expenses (Tier II investment expenses AFTER 2% AGI) No deduction if funds borrowed to purchase muni bonds 12-12

13. Investment Interest Expense Assume: investment interest expense of $20,000, interest income of $15,000, AGI of $65,000, and investment adviser fees of $2,000. 12-13 Investment income$15,000 Investment expenses (Tier II)$2,000 2% AGI1,300 Deductible investment expenses$700 Net investment income$14,300

14. Review Question 1 Which one of the following is a correct statement regarding the wash sale rules? a.The basis of the acquired securities is increased by the disallowed loss. b.Small differences in the maturity dates of bonds will not cause them to be classified as substantially identical. c.The wash sale rules do not apply to sales and investments in mutual funds. d.The wash sale rules do not apply to sales and investments in ETFs. 12-14

15. Review Question 2 Which one of the following is not currently a long-term capital gains rate? a.0% b.10% c.15% d.20% e.25% 12-15

16. Review Question 3 This year, Ken Bush sold several securities that left him with the following types of gains and losses: o long-term capital gain—$8,000 o short-term capital gain—$1,800 o long-term capital loss—$2,200 o short-term capital loss—$1,000 What is the net capital gain or loss on Ken’s security sales? a.net long-term loss of $1,400 b.net long-term gain of $2,320, and net short-term gain of $800 c.net long-term gain of $2,640 d.net long-term gain of $5,800, and net short-term gain of $800 e.net long-term gain of $6,600 12-16

17. Review Question 4 Which one of the following statements is incorrect regarding investment interest expense? a.Investment interest expense is deductible up to the amount of the net investment income. b.Excess investment interest expense cannot be carried forward into succeeding tax years. c.Interest paid or accrued to purchase or carry tax-exempt investments is not deductible. d.Net investment income is the excess of investment income over investment expenses. 12-17

18. Review Question 5 For the current tax year, Bob Phillips, an individual taxpayer filing a joint return, has $50,000 of investment interest expense and $20,000 of net investment income (interest income). Bob paid commissions of $1,500 during the current year. How much investment interest expense, if any, may Bob deduct in the current tax year? a.$0 b.$18,500 c.$20,000 d.$48,500 e.$50,000 12-18

19. ©2015, College for Financial Planning, all rights reserved. Session 12 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning