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FSU TAX 4001 - Chapter 5

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Chapter 51. Tax Treatment for Capital Gains and Losses of Non Corp. Taxpayer:i. To recognize capital gains or loss, it is necessary to have a sale or exchange of a capital assetii. Once it is deemed that a capital gain or loss has been realized and is to berecognized, it is necessary to classify the gains and losses as either short term or long termiii. If the asset is held for less than one year the gain or loss is classified as short term capital gain (STCG) or Short term capital loss (STCL)iv. Asset held for more than one year, the gain or loss is classified as a long term capital gain (LTCG) or long term capital loss (LTCL)b. Capital Gains: i. first step in determining capital gains is to calculate net capital gains (NCG) which is defined as the excess of net LTCG over net STCLii. Once NCG has been determined a portion of NCG may be classified as adjusted net capital gain (ANCG) which is subject to the lower rates of 0 or 15%iii. To compute NCG, determine all LTCG LTCL STCG STCL and then net the gains and lossesiv. NSTCG – if total STCG exceed STCL excess is called NSTCG. Opposite for NSTCLv. NLTCG – IF LTCG exceed STCL excess is a NLTCG. Opposite for NLTCLvi. The rates of 15% and zero apply to ANCG and the rate to use depends on the payers bracket1. Maximum rate is 15%, 0% for taxpayers in tax bracket under 15%c. ANCG: LTCGSi. All other LTCG receives the preferential rates of 0% or 15%ii. If a taxpayer has both LTCG and capital losses, the capital losses are first offset within the category, then any excess loss is offset against the highest rate LTCG category first and works down to the lowest rate categoryiii. NCG and ANCG will often be the same amount when a taxpayer has no capital losses and no qualified dividendsd. Capital Loses:i. To have a capital loss one must sell or exchange the capital asset for an amount less then the adjusted basisii. NSTCL: 1. NSTCL is the first offset against any NLTCG to determine NCG2. If NSTCL exceeds NLTCG, the capital loss may be offset, on a dollarfor dollar basis, against a non corp. tax payer ordinary income for amounts up to $3,0003. NCL is carried forward for an indefinite number of yearsiii. NLTCL:1. If there is both a NSTCG and a NSTCL, the NSTCL is initially offset against NSTCG on a dollar for dollar basis2. If NSTCL exceeds the NSTCG, the excess is offset against ordinary income on a dollar for dollar basis up to $3,000 year3. If you have both NSTCL and NLTCL, the NSTCL is offset against ordinary income firstiv. Capital Loses Applied to Capital Gains by Groups:1. If LTCG and LTCL must separate into three tax groups:a. 28% - includes capital gains and losses when capital asset is collectedly held for more than one yearb. 25% - consists of unrecaptured sec 1250 gains. No losses ingroupc. 15% - includes capital gains and losses when holding period is more than one year and capital asset is not a collectible or small business stock2. When a taxpayer has NSTCL and NSTCG, the NSTCL is first offset against NLTCG from 28% to 25% to 15%v. Tax Retirement for NCG:1. Lower rates have made tax [payers more interest in having capitalgains income rather than ordinary income2. Investors preferences for growth stock as opposed to stocks with high dividends have increases3. Significant reduction in tax rates for dividend income have resulted in increased interest in stocks with high dividends4.Chapter 61. Classifying Deductions as FOR versus FROM AGI a. Tax formula for individuals divides all allowable business, investment, and personal deductions into the following two categories:i. Deductions subtracted FROM GI in order to calculate AGI (FOR AGI deductions) andii. Deductions subtracted FROM AGI to calculate taxable income (FROM AGI deductionsb. The concept of AGI applies to individual tax payers, not to other entities such as corporations or partnershipsc. Sec. 62 specifically identifies deductions FOR AGI. All other deductions for individuals are deductions FROM AGI. Most common FOR AGI deductions include the following subject certain to limitations:i. All allowable expenses incurred on an individual’s trade or business, but not including an employee’s reimbursed business expenseii. Reimbursed employee business expensesiii. Certain business expenses incurred by performing artists and employees of a state or a political subdivision thereofiv. Losses from the sale or exchange of trade, business, or investment propertyv. Expenses attributable to the production of rent or royalty incomevi. Contributions to certain pension, profit sharing, or retirement plan arrangementsvii. Penalties paid to a bank or other savings institution because of the early withdrawal of funds from a certificate of deposit or time savings accountviii. Alimonyix. Moving expensesx. Cash payments made to a qualified health savings account or Archer Medical savings accountxi. Interest paid on qualified educational loans. xii. Qualified tuition and related expenses for higher education up to $4,000.xiii. One half of self employment tax imposed on self employed individuals and 100% of health insurance cost paid by such individualsd. Distinction between FOR AGI and FROM AGI is critical for two reasons:i. Tax formula allows individuals to deduct the greater of the standard deduction or the total FROM AGI (itemized deductions) in arriving at taxable income1. Thus a taxpayer does not benefit from these deductions if the total deductible amount for the year does not exceed the standard deduction2. Deductions FOR AGI, on the other hand, reduce AGI (and taxable income) even if the taxpayers uses the standard deduction in computing taxable incomeii. AGI acts as a limit on the amount of itemized deductions that can be taken1. Taxpayers may deduct certain itemized deductions such as medical expenses, casualty losses, and miscellaneous itemized deductions only to the extent the particular expense exceeds a prescribed percentage ofAGIa. Ex: an individual may deduct certain miscellaneous itemized deductions only to the extent the sum of these deductions for the year exceeds 2% of the individuals AGIi. These expenses include unreimbursed employee business expenses, expenses incurred to produce investment income, and the cost of tax advice and tax return preparationii. A tax payer may deduct medical expenses only to the extent the medical expenses exceed 10% of the individuals AGI for the yearb. Individual tax payers must first reduce casualty losses on personal use property by


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