1 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 Chapter 5 b Capital Gains exchange of a capital asset ii Once it is deemed that a capital gain or loss has been realized and is to be recognized it is necessary to classify the gains and losses as either short term or long term 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 iii 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 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 STCL ii 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 iv NSTCG if total STCG exceed STCL excess is called NSTCG Opposite for v NLTCG IF LTCG exceed STCL excess is a NLTCG Opposite for NLTCL vi The rates of 15 and zero apply to ANCG and the rate to use depends on gains and losses NSTCL the payers bracket 1 Maximum rate is 15 0 for taxpayers in tax bracket under 15 c ANCG LTCGS i 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 category iii NCG and ANCG will often be the same amount when a taxpayer has no capital losses and no qualified dividends d Capital Loses i ii NSTCL iii NLTCL To have a capital loss one must sell or exchange the capital asset for an amount less then the adjusted basis 1 NSTCL is the first offset against any NLTCG to determine NCG 2 If NSTCL exceeds NLTCG the capital loss may be offset on a dollar for dollar basis against a non corp tax payer ordinary income for amounts up to 3 000 3 NCL is carried forward for an indefinite number of years 1 2 3 If there is both a NSTCG and a NSTCL the NSTCL is initially offset against NSTCG on a dollar for dollar basis If NSTCL exceeds the NSTCG the excess is offset against ordinary income on a dollar for dollar basis up to 3 000 year If you have both NSTCL and NLTCL the NSTCL is offset against ordinary income first iv 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 year b 25 consists of unrecaptured sec 1250 gains No losses in group c 15 includes capital gains and losses when holding period is more than one year and capital asset is not a collectible or small business stock 2 When a taxpayer has NSTCL and NSTCG the NSTCL is first offset against NLTCG from 28 to 25 to 15 1 Lower rates have made tax payers more interest in having capital gains income rather than ordinary income Investors preferences for growth stock as opposed to stocks with high dividends have increases 3 Significant reduction in tax rates for dividend income have resulted in increased interest in stocks with high dividends 2 4 v Tax Retirement for NCG Chapter 6 1 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 and deductions ii Deductions subtracted FROM AGI to calculate taxable income FROM AGI b The concept of AGI applies to individual tax payers not to other entities such as c corporations or partnerships 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 expense ii Reimbursed employee business expenses iii Certain business expenses incurred by performing artists and employees of a state or a political subdivision thereof iv Losses from the sale or exchange of trade business or investment property v Expenses attributable to the production of rent or royalty income vi Contributions to certain pension profit sharing or retirement plan arrangements vii Penalties paid to a bank or other savings institution because of the early withdrawal of funds from a certificate of deposit or time savings account viii Alimony ix Moving expenses x Cash payments made to a qualified health savings account or Archer Medical savings account Interest paid on qualified educational loans xi 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 individuals d 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 income 1 Thus a taxpayer does not benefit from these deductions if the total deductible amount for the year does not exceed the standard deduction 2 Deductions FOR AGI on the other hand reduce AGI and taxable income even if the taxpayers uses the standard deduction in computing taxable income ii AGI acts as a limit on the amount of itemized deductions that can be taken 1 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 of AGI a 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 AGI i These expenses include unreimbursed employee business expenses expenses incurred to produce investment income and the cost of tax advice and tax return preparation ii A tax payer may deduct medical expenses only to the extent the medical expenses exceed 10 of the individuals AGI for the year b Individual tax payers must first reduce casualty losses on personal use property by 100 per casualty event 2 AGI also acts as a limit on the deductibility of certain itemized deductions by placing