1. Income - Capital Gain or Loss
Notes/Handouts
4/20/2017
Income - Capital Gain or Loss v1.0 VO.ppt
Income - Capital Gain or Loss
Form Line 13
Pub Tab 2
Pub 17 Chapters 13-16
LEVEL 2, 3 TOPIC
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2. 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
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3. 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
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4. 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
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5. 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
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6. 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 $10 per share, splits 2 for 1
Now have 200 $5 per share
Dividend reinvestments
Buy additional shares at current price
Example:
100 $10
5 $20
3 $18
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7. 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.
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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
$ 2,100.00
20 shares Tractor Co.
$0.00 $
100 shares Car Co.
$14,000.00
500 shares Couch Co.
$ 2,000.00
25 shares Technology Co.
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15. 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
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16. 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
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17. 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
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18. 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
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19. 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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20. 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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21. 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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22. 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)
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23. 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
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24. 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
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25. 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
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26. 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
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27. 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
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28. 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
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29. 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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30. 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
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31. 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!
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32. 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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33. 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
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34. 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
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