Income - Capital Gain or Loss Notes/Handouts 4/20/2017 4491-10 Income - Capital Gain or Loss v1.0 VO.ppt Income - Capital Gain or Loss Form 1040 Line 13 Pub 4012 Tab 2 Pub 17 Chapters 13-16 LEVEL 2, 3 TOPIC 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008 1

Stock Sales – Objectives Notes/Handouts 4/20/2017 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 NJ Training TY2010 v1.0 NJ Training TY 2008

Stock Sales – Schedule D Notes/Handouts 4/20/2017 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 NJ Training TY2010 v1.0 NJ Training TY 2008

What information is needed? Notes/Handouts 4/20/2017 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 NJ Training TY2010 v1.0 NJ Training TY 2008

What is the basis of stock? Notes/Handouts 4/20/2017 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 NJ Training TY2010 v1.0 NJ Training TY 2008

Adjusted Basis Events can change share basis Stock splits Notes/Handouts 4/20/2017 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 NJ Training TY2010 v1.0 NJ Training TY 2008

Sales Commissions Commission paid will affect the basis Notes/Handouts 4/20/2017 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. 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Basis other than cost Inherited Gift Notes/Handouts 4/20/2017 Basis other than cost Inherited Different in 2010 – Discussed later Gift Out of scope Taxpayer cannot provide information 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Holding period Holding period Short-term: 1 year or less Notes/Handouts 4/20/2017 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 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Holding period (continued) Notes/Handouts 4/20/2017 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 NJ Training TY2010 v1.0 NJ Training TY 2008

PROPERTY INHERITED PRIOR 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 11/30/2010 NJ Training TY2010 v1.0

PROPERTY INHERITED IN 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 11/30/2010 NJ Training TY2010 v1.0

What info do I need from 1099-B? Notes/Handouts 4/20/2017 What info do I need from 1099-B? Sale date Sale price # of shares Description 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Broker’s Substitute 1099-B Notes/Handouts 4/20/2017 Broker’s Substitute 1099-B Substitute 1099-B Date of Sale Box 1a Stocks,Bonds-Proceeds Box 2 (less commission) Description Box 7 Federal Income Tax Withheld Box 4 2-23-10 $ 2,100.00 20 shares Tractor Co. $0.00 5-01-10 $ 900.00 100 shares Car Co. 6-22-10 $14,000.00 500 shares Couch Co. 9-06-10 $ 2,000.00 25 shares Technology Co. 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Capital gain distributions Notes/Handouts 4/20/2017 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 NJ Training TY2010 v1.0 NJ Training TY 2008

SCHEDULE K-1 CAPITAL 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 11/30/2010 NJ Training TY2010 v1.0

Tax Liability Net Loss Net loss can offset all gains, plus Notes/Handouts 4/20/2017 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 return 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Capital Loss Carry Forward Notes/Handouts 4/20/2017 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 HERE 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

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 11/30/2010 NJ Training TY2010 v1.0

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 11/30/2010 NJ Training TY2010 v1.0

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

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 NJ Training TY2010 v1.0

Sale Of Home -- Objectives Notes/Handouts 4/20/2017 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 LIVES IN IT MOST OF THE TIME COOKING, SLEEPING & BATHROOM FACILITIES HOUSE BOAT MOBILE HOME CO-OP APARTMENT CONDO LEVEL 3 TOPIC 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008 23

What is considered a “main” home? Notes/Handouts 4/20/2017 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 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Ownership And Use Tests Notes/Handouts 4/20/2017 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 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Notes/Handouts 4/20/2017 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 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Gain (or loss) from sale of home Notes/Handouts 4/20/2017 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 basis 11/30/2010 NJ Training TY2010 v1.0 NJ Training TY 2008

Where do I report gain (or loss)? Notes/Handouts 4/20/2017 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 NJ Training TY2010 v1.0 NJ Training TY 2008

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

Sale of Home Quiz #1 Answers 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 11/30/2010 NJ Training TY2010 v1.0

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

SALE OF HOME QUIZ #3 ANSWERS 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 NJ 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 NJ Training TY2010 v1.0 34