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Frequently Asked Tax Questions And Answers
Keyword: Capital Gains
1.1 IRS Procedures: General Procedural Questions
How long do I need to keep certain records?
Records such as receipts, canceled checks, and other documents that prove
an item of income or a deduction appearing on your return should be kept at
least until the statute of limitations expires for that return. Usually this
is three years from the date the return was due or filed, or two years from
the date the tax was paid, whichever is later. There is no period of limitations
when a return is false or fraudulent or when no return is filed. You should
keep some records indefinitely, such as property records, since you may need
them to determine the basis of the property if it to prove the amount of gain
or loss if the property is sold. For more details, refer to Publication 552 Recordkeeping
for Individuals, or Tax Topic 305 on Recordkeeping.
If you are an employer, you must keep all your employment tax records for
at least four years after the tax is due or paid, whichever is later. For
additional information, refer to Publication 583, Starting a Business
and Keeping Records. People in business often have expenses for travel,
entertainment, and gifts. The documentation you should keep for each of these
expenses can be found in Publication 463, Travel, Entertainment, Gift
and Car Expenses.
References:
9.4 Estimated Tax: Large Gains, Lump-sum Distributions, etc.
If I anticipate a sizable capital gain on the sale of an investment during
the year, do I need to make a quarterly estimated tax payment during the tax year?
If you first receive income subject to estimated tax during a period other than
the first quarter, you must make your first payment by the due date for the period
the income is received. You can pay your entire estimated tax by the due date for
the period the income is received, or you can pay it in installments by the due date
for that period and the due dates for the remaining periods.
If you are making estimated tax payments you can increase your quarterly estimated
tax payments or increase your Federal income tax withholding to cover the tax liability.
If you have the proper amount withheld you may not be required to make estimated tax
payments nor have to file Form 2210 (PDF), Underpayment
of Estimated Tax by Individuals, Estates and Trusts, with your tax return (as
you would if you just increased the remaining estimated tax payments). If you wait
and make increased estimated tax payment in the later quarters, you would have to
file Form 2210 with your tax return because we do not know when you received the income.
Since you really did not receive the income evenly throughout the year, you have to
tell us when the income was received by filing Form 2210.
References:
If I sell stock at a gain, do I pay estimated taxes on the entire profit
when the next quarterly payment is due or can I divide it by the number of quarterly
payments left for the year and make these equal payments at each subsequent quarter?
If you first receive income subject to estimated tax during a period other than
the first quarter, you must make your first payment by the due date for the period
the income is received. You can pay your entire estimated tax by the due date for
the period the income is received, or you can pay it in installments by the due date
for that period and the due dates for the remaining periods.
References:
On December 20, I received a large mutual fund distribution. Due to the
large distribution I'm going to owe $7,000 when I file my return. Is it okay to just
pay the $7,000 when I file my return?
If the $7,000 in tax is a result of a distribution not covered by prepayments of
tax, either through income tax withholding or estimated tax payments, you should make
an estimated tax payment by January 15th of the next year. If you wait to pay the
$7,000 with your return, you may be penalized for an underpayment of estimated taxes.
Even if you make an adequate payment of tax by January 15th, you may be assessed an
estimated tax penalty by the IRS service center when your return is processed unless
you file Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts . This is because estimated tax payments
are normally made in four equal installments and the IRS will not know your liability
occurred in the fourth quarter unless you explained when the income was received.
You may be subject to the penalty if you owe at least $1,000 in tax after subtracting
your withholding and credits from your tax liability, and you did not prepay at least
90% of your current year's tax or 100% of your previous year's tax. (The latter percentage
is higher for higher (110 %) ($75,000 if MFS) income taxpayers with adjusted gross
incomes from the previous year of more than $150,000.)
If you make an adequate payment by January 15th but made no earlier estimated tax
payments, use Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts, to compute your penalty. Check the box
on the front page selecting the Annualized Income Installment method, and then complete
Schedule AI on page 3. When you compute the penalty on page 2 of that form using the
numbers from Schedule AI, your penalty will be $0 if you made an adequate payment.
Even if you did not make the January 15th payment or made an adequate payment, the
annualized income method on Form 2210 may significantly reduce the estimated tax penalty.
For more information on estimated tax payments and the underpayment of estimated
tax penalty, refer to Publication 505, Tax Withholding and Estimated Tax.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts
10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)
I lived in a home as my principal residence for the first 2 of the last
5 years. For the last 3 years, the home was a rental property before selling it. Can
I still avoid the capital gains tax and, if so, how should I deal with the depreciation
I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for
at least 2 years and lived in it as your main home for at least 2 years, you can exclude
up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you
cannot exclude the portion of the gain equal to depreciation allowed or allowable
for periods after May 6, 1997. This gain is reported on Form 4797. If you can show
by adequate records or other evidence that the depreciation allowed was less than
the amount allowable, the amount you cannot exclude is the amount allowed. Refer toPublication 523 , Selling Your Main Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and
reporting the amount of the eligible exclusion.
References:
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
How do I figure the cost basis of stock that has split, giving me more of
the same stock, so I can figure my capital gain (or loss) on the sale of the stock?
When the old stock and the new stock are identical the basis of the old shares
must be allocated to the old and new shares. Thus, you generally divide the adjusted
basis of the old stock by the number of shares of old and new stock. The result is
your new basis per share of stock. If the old shares were purchased in separate lots
for differing amounts of money, the adjusted basis of the old stock must be allocated
between the old and new stock on a lot by lot basis.
References:
How do I calculate the cost basis of the shares that have split and are
later sold from my employee stock purchase plan?
You need to determine what your basis is in the company stock on the date of the
split. The new shares assume part of your basis in the company stock on that date.
You must divide the adjusted basis in the old stock by the number of shares of old
and new stock. The result is your basis for each share of stock.
For example, if you owned two shares of company stock with a basis in one at $30
and the other $45, and the company declares a three for one stock split, you now have
six shares of stock. Three of the shares will have a basis of $10, and three will
have a basis of $15.
Because this is an Employee Stock Option Plan, you may have to report some or all
of the gain on the sale of this stock as ordinary income (wages). For more information
about employee stock option plans, see Publication 525 , Taxable
and Nontaxable Income.
References:
Would shares in mutual fund acquired through dividend reinvestment in prior
years be long-term capital gains while shares acquired through dividend reinvestment
in the year of sale be treated as short-term capital gains?
Any shares or fractional shares purchased and sold during the current tax year
are short-term capital assets. For shares purchased in the year previous to the tax
year to be considered long-term, the holding period must be more than one year.
References:
Can I take a long-term capital loss (up to the $3,000 limit) against my
ordinary income without any long-term capital gain?
Yes. You can use your total net loss to reduce your income dollar for dollar,
up to the $3000 limit ($1,500 if you are married and file a separate return).
For more information on capital gains and losses and capital loss carryovers, refer
to Chapter 4 of Publication 550, Investment Income and Expenses.
References:
Can I use a long-term capital loss carried over from a prior year to offset
a short-term capital gain?
A loss carryover maintains its character as long-term or short-term and must first
be used against gains, if any, in its own category, but can then offset net gains
from the other category, as well as up to $3,000 ($1,500 if married filing separate)
of ordinary income. If, for example, your only long-term gain or loss is the long-term
capital loss carryover, then line 17 of Form 1040, Schedule D (PDF),
which nets the net short-term gain or loss against the net long-term gain or loss,
will apply your loss carryover against your short-term gain. After that, any remaining
net loss will be allowable as a deduction against up to $3,000 ($1,500 if married
filing separate return) of your ordinary income. The remainder will be available to
be carried over to the following year as long-term loss.
References:
Can I use a long-term capital loss to offset a short-term capital gain before
using it to offset a long-term gain?
No, long-term capital gains and losses must first be combined to arrive at net
long-term gain or loss before the result can be netted against the net short-term
gain or loss. If you follow the Form 1040, Schedule D (PDF), Capital
Gains and Losses, Parts 1 and 2, line-by-line, the form will perform the netting
for you in this order.
References:
Can short-term capital gains be offset with long-term capital losses?
Before a loss from one category, short or long term, can offset gain from the other
category, the losses and gains from each category must be combined to arrive at a
net gain or loss from that category. Then, the net gain or loss from each category
is combined.
When you carry a capital loss over to the following year, it retains its character
as long-term or short-term and must be first combined with the other entries in its
category. There is a capital loss carryover worksheet each year in the
Instructions for Form 1040, Schedule D .
Refer to Reporting Capital Gains and Losses in Publication 550, Investment
Income and Expenses .
References:
How do I determine my gain or loss on the proceeds reported on Form 1099-B
from a short sale entered into last year if I have not yet bought the stock to deliver
back to my broker?
In general, you cannot determine your gain or loss until you purchase the stock
that you are going to deliver to close the short sale. You still need to report the
gross proceeds on Schedule D so that the total of lines 3 and 10, column (d), reconciles
with all of your Forms 1099-B.
Also, in columns b and c write "short sale." In column f, write "see attached statement."
In the statement, explain the details of the short sale and that it is not closed.
Include your name as it appears on your return and your social security number.
For more information on rules and exceptions that may apply, refer to Chapter 4
of Publication 550, Investment Income and Expenses.
References:
Do I need to pay taxes on that portion of stock I gained as a result of
a split?
No, you generally do not need to pay tax on the additional shares of stock you
received due to the stock split. You will need to adjust your per share cost of the
stock. Your overall cost basis has not changed, but your per share cost has changed.
You will have to pay taxes if you have gain when you sell the stock. Gain is the
amount of the proceeds from the sale, minus sales commissions, that exceeds the adjusted
basis of the stock sold.
References:
I buy and sell stocks as a day trader using an online brokerage firm. Can
I treat this as a business and report my gains and losses on Schedule C?
A business is generally an activity carried on for a livelihood or in good faith
to make a profit. Rather than being defined in the tax code, exactly what activities
are considered business activities has long been the subject of court cases. The facts
and circumstances of each case determine whether or not an activity is a trade or
business. Basically, if your day trading activity goal is to profit from short-term
swings in the market rather than from long-term capital appreciation of investments,
and is expected to be your primary income for meeting your personal living expenses,
i.e. you do not have another regular job, your trading activity might be a business.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized
Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election
to mark to market under Internal Revenue Code Section 475 (f).
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property. An election
to mark to market generally must be made by the due date of the prior year's return.
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Commissioner. Though there is no
publication specific to day traders, the details for traders information for securities
and commodities is covered in Internal Revenue Code Section 475(f) and Revenue Procedure
99-17, and as modified by Rev. Proc. 200-19 .
References:
Is there any publication that explains the proper way to file a Schedule
C as a day trader?
There is no publication specific to DayTraders. But see the
Instructions for Form 1040, Schedule D . The section "Traders in Securities" has information for
DayTraders.
Internal Revenue Code section 475(f) and Revenue Procedure 99-17 apply only to
traders who elect to use mark-to-market method of Accounting.
References:
I have expenses associated with my day trading business, but I am unsure
about how to report my gains and losses. How do I file as a day trader and how do
I use the mark-to-market accounting method?
Special rules apply if you are a trader in securities in the business of
buying and selling securities for your own account. To be engaged in business as a
trader in securities, you must meet all the following conditions.
. You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation
. Your activity must be substantial.
. You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your
activity is a securities trading business.
. Typical holding periods for securities bought and sold
. The frequency and dollar amount of your trades during the year.
. The extent to which you pursue the activity to produce income for a livelihood.
. The amount of time you devote to the activity.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF),
Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses,
unless you file an election to change your method of accounting.
If you qualify for and elect to change to the mark-to-market method of accounting,
you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.
The mark-to-market method of accounting cannot be revoked without the consent of
the Secretary. Though there is no publication specific to day traders, the details
for traders in securities and commodities are covered in Internal Revenue Code section
475(f) and Revenue Procedure 99-17.
If you elect to use the mark-to-market method of accounting, a security that you
hold at the end of the tax year will generally be treated as sold at its fair market
value on the last business day of the tax year. Any gain or loss must be recognized.
That gain or loss is taken into account as an adjustment in figuring your gain and
loss when you later dispose of the security. See Publication 550, Investment
Income and Expenses, for general information on mark-to-market accounting rules.
References:
- Publication 535, Business Expenses
- Publication 550, Investment Income and Expenses
- Form 3115 (PDF), Application for Change
in Accounting Method
- Form 4797 (PDF), Sales of Business Property
- Internal Revenue Code Section 475(f)
- Revenue Procedure 99-17
I am a day trader. How do I go about paying tax on the gain as a business
and not on Schedule D?
Special rules apply if you are a trader in securities in the business of
buying and selling securities for your own account. To be engaged in business as a
trader in securities, you must meet all the following conditions.
. You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation.
. Your activity must be substantial.
. You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your
activity is a securities trading business.
. Typical holding periods for securities bought and sold.
. The frequency and dollar amount of your trades during the year.
. The extent to which you to produce income for a livelihood.
. The amount of time you devote to the activity.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF),
Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses,
unless you file an election to change your method of accounting.
If you qualify and elect to change to the mark-to-market method of accounting,
you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.
The mark-to-market method of accounting cannot be revoked without the consent of
the Secretary. Though there is no publication specific to day traders, information
for traders in securities and commodities is in Section 475(f) of the Internal Revenue
Code, Revenue Procedure 99-17, Revenue Procedure 2002-19, and Publication 550, Investment
Income and Expenses.
For details about not-for-profit activities, refer to Chapter 1 in Publication 535, Business
Expenses. That chapter explains how to determine whether your activity is carried
on to make a profit and how to figure the amount of loss you can deduct.
Regardless of whether your day trading activities are reported on Schedule D or
on Form 4797, you may need to pay tax on your gains by following the requirements
for making estimated tax payments on Form 1040-ES (PDF), Estimated
Tax for Individuals.
References:
10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
If I sell one mutual fund and use the proceeds to buy another, do I have
to report the capital gains or can I wait until I sell and don't buy another fund?
Does it matter if I stay within the same family of funds?
You would have to report any capital gains realized on the sale. Even assuming
this transaction meets the requirements of an exchange, rather than a sale, the exchange
of shares of one fund for those of another is a taxable exchange. This is true even
if both funds are within the same family of funds.
References:
If my children have mutual funds, how are the dividends and capital gains
reported?
If a child is 14 years old or older and has a requirement to file an income tax
return, he or she would report dividends and capital gains no differently than any
other taxpayer. If the child is under age 14 and his or her only income is from interest
and dividends (including capital gain distributions), the child's parents can make
an election to include the income on the parent's return. If the parents make this
election, then the child does not have to file a return. The election is made on Form 8814 (PDF), Parent's Election To Report Child's Interest
and Dividends.
In order to make the election under Form 8814,
the child must be required to file a return,
the dividend and interest income cannot exceed $7,500
there must be no estimated tax payment made for the year and no prior overpayment
applied to the tax year under the child's name and social security number,
there must be no federal tax taken out of the child's income under the backup
withholding rules, and
the parent must be the parent whose return is used for the special tax rules for
children under 14.
If a child under the age of 14 has investment income and the parents do not make
the above election, the child reports the income as any other taxpayer would. Special
rules on how the investment income is taxed, however, may apply. A child under the
age of 14 with investment income (interest, dividends, capital gains, etc.) of more
than $1,500 may be subject to the parents' tax rate. The special tax computation is
figured on Form 8615 (PDF), Tax for Children Under
Age 14 Who Have Investment Income of More Than $1,500.
For more information, refer to Publication 929, Tax Rules for Children
and Dependents
References:
- Form 8814 (PDF), Parent's Election To
Report Child's Interest and Dividends
- Form 8615 (PDF), Tax for Children Under
Age 14 Who Have Investment Income of More Than $1,400
- Publication 929, Tax Rules for Children and Dependents
I have both purchased and sold shares in a money-market mutual fund. The
fund is managed so the share price is constant. All gain is reported as dividends.
Do I have to report the sale of these shares?
Yes, you report the sale of your shares on Form 1040, Schedule D (PDF), Capital
Gains and Losses. Generally, whenever you sell, exchange, or otherwise dispose
of a capital asset, you report it on Schedule D.
If the share price were constant, you would have neither a gain nor a loss when
you sell shares because you are selling the shares for the same price you purchased
them.
If you actually owned shares that were later sold, the fund or the broker should
have issued a Form 1099-B There is no requirement with that form that there be gain
or loss on the sale, only a sale or exchange of an investment asset and sales proceeds.
References:
If I previously sold shares of a mutual fund and reported the gains or losses
using the FIFO method, can I switch to an average basis method?
Yes, you can. The only requirement for using an average basis is that you acquired
the shares at various times and prices, and you left the shares on deposit in an account
handled by a custodian or agent who acquires or redeems those shares. An average basis
method, once adopted, must be disclosed on your tax return and the method cannot be
changed back without permission from the Commissioner of the Internal Revenue Service.
Before computing the basis of shares sold using an average basis, ensure that you
have reduced your previous total basis by the cost of the shares accounted for using
the FIFO method.
References:
How do I tell the IRS I used an average basis method in reporting the gain
or loss from my mutual funds?
Either write the name of the average basis method used as a notation on Form 1040, Schedule D (PDF), Capital Gains and Losses ,
or attach a sheet to the Schedule D showing in detail how you computed the basis of
the shares sold. Whenever you attach a statement to your return, include your name(s)
and social security number(s). Also include "AVGB" in column (a) of Schedule D.
References:
I received a 1099-DIV showing a capital gain. Why do I have to report capital
gains from my mutual funds if I never sold any shares?
A mutual fund is a regulated investment company that pools funds of investors allowing
them to take advantage of a diversity of investments and professional asset management.
You own shares in the fund, but the fund owns assets such as shares of stock, corporate
bonds, government obligations, etc. One of the ways the fund makes money for its investors
is to sell these assets at a gain. If the asset was held by the mutual fund for more
than one year, the nature of the income is capital gain, which gets passed on to you.
These are called capital gain distributions, which are distinguished on Form 1099-DIV (PDF) , from income that is from other profits, called
ordinary dividends.
Capital gains distribution are taxed as long term capital gains regardless of how
long you have owned the shares in the mutual fund. If your capital gains distribution
is automatically reinvested, the reinvested amount is the basis of the additional
shares purchased.
References:
Where are mutual fund short-term capital gain distributions reported?
Capital gain distributions from a mutual fund are by definition long-term. That's
why they appear only in Part II of Form 1040, Schedule D (PDF), Capital
Gains and Losses. The annual statement you receive from your mutual fund may
list short-term capital gains, but your Form 1099-DIV will show those amounts as ordinary
dividends in box 1a.
Ordinary dividends (which include the mutual fund's profits from short term capital
gains) are reported on Form 1040, Schedule B (PDF), Interest
& Dividend Income , or Form 1040A, Schedule 1 (PDF), Interest
and Ordinary Dividends, if the total is over $1500. In addition, you enter the
total ordinary dividends on line 9a of Form 1040 or line 9a of Form 1040A.
The 2003 Form 1099-DIV has added box 1b "Qualified Dividends." This box shows the
portion of the amount in box 1a may be eligible for the new 15%
or 5% capital gains rates. See the instructions for Form 1040/1040A for how to determine
the eligible amount and report this amount on line 9b of your Form 1040 or 1040A .
Refer to the line 13 instructions of Form 1040 for exceptions when you can enter
capital gain distributions directly on line 13 of Form 1040 without having to file
Schedule D.
References:
My end-of-year statement from a mutual fund company showed amounts in 4
categories: (1) capital gains, (2) short-term capital gains, and (3) ordinary dividend
and (4) qualified dividends. When my Form 1099-DIV came, the short-term capital gains
were lumped in with ordinary dividends. Which is correct and where do I list the short-term
capital gains?
Your Form 1099-DIV is correct, but so is your annual statement. For the purpose
of reporting taxable income on your tax return, capital gain distributions are defined
as long-term capital gains only. Short-term capital gains are taxed as ordinary income
and are therefore treated as ordinary dividends on Form 1099-DIV (PDF) .
Box 1b of your Form 1099-DIV shows the portion of the amount in box 1a that may
be eligible for the new 15% or 5% capital gain rates. See the
Instructions for Form 1040 and
Instructions for Form 1040A for how to determine
the eligible amount and report this amount on line 9b of your, Form 1040 (PDF) Form 1040A (PDF) .
The short-term capital gains will be in box 1a "ordinary dividends" on 1099-DIV.
These will be reported on line 9a of 1040/1040A.
Report the fund's short-term capital gains as part of your total ordinary dividends
on line 9 of your Form 1040 or 1040A. (You may have to also report them on Form 1040, Schedule B (PDF), Interest & Dividend Income or Form 1040A, Schedule 1 (PDF), Interest and Ordinary Dividends .
Refer to the instructions to the schedule.)
References:
How can I use mutual fund short-term capital gains, which are reported on
Form 1099-DIV in Box 1a as "Ordinary Dividends," to help offset short-term capital
losses?
You cannot. You did not sell the assets that produced this income, the mutual fund
did. All income that is taxed as ordinary income flows through to you as ordinary
dividends, whether the income is from interest, dividends, or the sales of short-term
capital assets.
In the same manner, you report capital gain distributions as long-term capital
gains on your return regardless of how long you have owned the shares in the mutual
fund. This is because the asset was held and then sold by, the mutual fund, not by
you.
Report your total ordinary dividends (including the short-term capital gains in
your mutual fund) on Form 1040, line 9a, or Form 1040A, line 9a, with your other ordinary
dividends, if any. You may also have to file Form 1040, Schedule B (PDF) , Interest
& Dividend Income or Form 1040A, Schedule 1 (PDF), Interest
and Ordinary Dividends.
References:
How do you list gains from mutual funds on Schedule D and Form 1040 when
some mutual funds list short-term capital gains separately and others lump short-term
capital gains and taxable dividends together as dividends?
Only the capital gain distributions are reported on Form 1040, Schedule D (PDF), Capital Gains and Losses . They are reported in
Part II as long-term capital gains. Short-term capital gains are taxed as ordinary
income and are therefore treated as ordinary dividends on Form 1099-DIV. They are
reported on line 9a of Form 1040 (PDF) or Form 1040A (PDF).
Because many mutual fund companies send out annual fund statements as well as Forms
1099-DIV, or "consolidated statements," some confusion has arisen regarding short-term
capital gains. The purpose of Form 1099-DIV is to provide you with information to
report income correctly on your tax return.
The annual report often breaks down the income from fund activity as dividends,
tax-exempt dividends, short-term capital gains, long-term capital gains, returns of
capital, and undistributed capital gains. Form 1099-DIV, on the other hand, will show
only ordinary dividends (which includes the fund's short-term capital gains), capital
gain distributions, and returns of capital (nontaxable distributions), and qualified
dividends.
Mutual fund companies may combine the annual fund information with the Form 1099-DIV
information into a consolidated statement. If this is what you receive, look for the
part of the statement identified as the Form 1099-DIV or that contains language such
as "in lieu of Form 1099-DIV."
References:
If a mutual fund's assets earned tax-free dividends, are capital gains tax
free when the fund is sold?
No. The kind of income the assets in the fund earn is tax-free. When you sell your
shares in the fund, a taxable gain or deductible loss is realized on the sale. This
is the true also for the sale of tax-exempt securities such as municipal bonds.
References:
On December 20, I received a large mutual fund distribution. Due to the
large distribution I'm going to owe $7000 when I file my return. Is it okay to just
pay the $7000 when I file my return?
If the $7,000 in tax is a result of a distribution not covered by prepayments of
tax, either through income tax withholding or estimated tax payments, you should make
an estimated tax payment by January 15th of the next year. If you wait to pay the
$7,000 with your return, you may be penalized for an underpayment of estimated taxes.
Even if you make an adequate payment of tax by January 15th, you may be assessed an
estimated tax penalty by the IRS service center when your return is processed. This
is because estimated tax payments are normally made in four equal installments and
the IRS will not know your liability occurred in the fourth quarter unless you file Form 2210 (PDF), Underpayment of Estimated Tax by Individuals,
Estates and Trusts.
You may be subject to the penalty if you owe at least $1,000 in tax after subtracting
your withholding from your estimated tax liability, and you did not prepay at least
90% of your current year's tax or an amount equal to 100% of your previous year's
tax. (The latter percentage is higher for higher-income taxpayers with adjusted gross
incomes from the previous year of more than $150,000.)
If you make an adequate payment by January 15th but made no earlier estimated tax
payments, use Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts, to compute your penalty. Check the box
on the front page selecting the Annualized Income Installment method, and then complete
Schedule AI on page 3. When you compute the penalty on page 2 of that form using the
numbers from Schedule AI, your penalty will be $0. Even if you did not make the January
15th payment, the annualized income method on Form 2210 may significantly reduce the
estimated tax penalty if the income for which there was no prepayment of tax was earned
in the third or fourth quarters of the year.
For more information on estimated tax payments and the underpayment of estimated
tax penalty, refer to Publication 505, Tax Withholding and Estimated Tax.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts
11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges
Can you sell rental property and reinvest it into rental property
without paying capital gains tax?
No. A deferred exchange will be treated as a sale rather than a tax free
exchange if the taxpayer actually or constructively receives money on other
property in full consideration of the relinguished property. However, rental
property may be exchanged directly for other rental property of like kind.
Gain realized from such an exchange is deferred. For additional information
on like-kind exchanges, refer to Publication 544, Sales and Other
Dispositions of Assets.
References:
I have heard that I can sell my rental property and use the proceeds
to purchase rental property of equal or greater value and the transaction
is viewed just like an exchange in that the tax is deferred until the new
property is sold. Is this true?
What you have heard about is a like-kind exchange. A like-kind exchange,
when properly executed, represents a way to postpone the recognition (taxation)
of gain essentially by shifting the basis of old property to new property.
If, in addition to giving up like-kind property, you pay money in a like-kind
exchange, you still have no recognized gain or loss. The basis of the property
received is the basis of the property given up, increased by the money paid.
There are several rules and restrictions that must be strictly adhered to
in order for a successful exchange to take place. Deferred exchanges will
be treated as a sale rather than an exchange to the extent that the taxpayer
actually or constructively receives money or other (not like kind) property
in exchange for the like-kind property given up. For more information refer
to .Publication 544, Sales and Other Disposition of Assets ,
and Form 8824 (PDF) Instructions, Like-Kind
Exchanges .
References:
We sold a rental property last year and used the 1031 Tax Deferred
Exchange law to defer the gain into another like-kind property. How do I report
this transaction on my tax return?
Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form
explain how to report the details of the exchange. Report the exchange even
though no gain or loss is recognized.
If you have any taxable gain, resulting from the transaction, because you
had a partially deferred exchange or otherwise received money or unlike property,
report it on Form 4797 (PDF), Sale of Business
Property, and Form 1040, Schedule D (PDF), Capital
Gains and Losses. Refer to Publication 544, Sales and Other Dispositions
of Assets, which has a detailed section on qualifying like-kind exchanges.
References:
Can we move into our rental property, live there as our main home
for two years, and sell it without having to pay capital gains tax?
You may be able to exclude your gain from the sale of your main home that
you have also used for business or to produce rental income if you meet the
ownership and use tests, detailed in Publication 523, Sale of Your
Home.
However, if you were entitled to take depreciation deductions because you
used your home for business purposes or as rental property, you cannot exclude
the part of your gain equal to any depreciation allowed or allowable as a
deduction for periods after May 6, 1997. (Note: If you can show by adequate
records or other evidence that the depreciation deduction allowed (did deduct)
was less than the amount allowable (could have deducted), the amount you cannot
exclude is the smaller of those two figures.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses,
as described in Publication 523, Selling Your Home.
References:
12.8 Small Business/Self-Employed/Other Business : Schedule C & Schedule SE
I buy and sell stocks as a day trader using an online brokerage
firm. Can I treat this as a business and report my gains and losses on Schedule
C?
A business is generally an activity carried on for a livelihood or in good
faith to make a profit. Rather than defined in the tax code, exactly what
activities are considered business activities has long been the subject of
court cases. The facts and circumstances of each case determine whether or
not an activity is a trade or business. Basically, if your day trading activity
goal is to profit from short-term swings in the market rather than from long-term
capital appreciation of assets, if your income is primarily from the sale
of securities rather than from dividends and interest paid on securities,
and if you expect this income to be your primary income for meeting your personal
living expenses, i.e. you do not have another regular job, then your trading
activity might be a business.
For details about not-for-profit activities, refer to Publication 535, Business
Expenses. That chapter explains how to determine whether your activity
is carried on to make a profit and how to figure the amount of loss you can
deduct.
If your trading activity is a business, your trading expenses would be
reported on Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship) , instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses,
however, would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses , unless you file an election to change you method of
accounting.
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses and your
trading expenses in Part II of Form 4797, Sale of Business Property. See Publication 550, Investment Income and Expenses , for details.
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Secretary. Though there
is no publication specific to day traders, the details for traders in securities
and commodities are covered in Internal Revenue Code Section 475 (f) and Revenue
Procedure 99-17.
References:
12.9 Small Business/Self-Employed/Other Business : Starting or Ending a Business
How is the withdrawal of a partner handled?
Unfortunately, the answer to this question has many variables. Publication 541, Partnerships "Disposition of Partner's Interest"
on Partnerships should provide the information needed.
References:
13.4 Aliens and U.S. Citizens Living Abroad: Nonresident Alien - General
I am a nonresident alien and invested money in U. S. stock market through
a U.S. brokerage company. Are the dividends and the capital gains taxable? If yes,
how are they taxed?
Generally, capital gains received by a nonresident alien not present in the United
States for 183 days or more are not taxable in the United States. Certain gains, however,
are subject to the 30% withholding rate or if applicable, a reduced tax treaty rate
on the gross amount of the following items:
1. Gains on disposal of timber, coal, or domestic iron ore with a retained economic
interest, unless an election is made to treat those gains as income effectively connected
with a U.S. trade or business,
2. Gains on contingent payments received from the sale or exchange after October
4, 1966, of patents, copyrights, secret processes and formulas, goodwill, trade marks,
trade brands, franchises, and other sale property,
3. Gains on certain transfers of all substantial rights to, or an undivided interest
in, patents if the transfers were made before October 5, 1966, and
4. Certain gains from the sale or exchange of original issue discount obligations
issued after March 31, 1972.
Dividends are withheld upon at the 30% or lower tax treaty rate. If your withholding
is not at the correct rate, a nonresident alien should file Form 1040NR (PDF), U.S. Nonresident Alien Income Tax Return , to claim a refund
of excess withheld taxes.
References:
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