ShareWare OnLine 2/ShareWare OnLine Volume 2 (CMS Software)(1993).iso/finance/ttool92.zip/CHAPT17.DOC

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Chapter 17. Reporting Gains and Losses

Maximum tax rate on capital gains. The maximum tax rate on net capital gains
is 28%.

Introduction

This chapter discusses how to report capital gains and losses from sales,
exchanges, and other dispositions of investment property on Schedule D of
Form 1040. The discussion includes:

∙  How to report short-term gains and losses,

∙  How to report long-term gains and losses,

∙  How to figure capital loss carryovers, and

∙  Instructions on how to complete Schedule D with an illustrated example.

If you sell or otherwise dispose of property used in a trade or
business or for the production of income, see Publication 544, Sales
and Other Dispositions of Assets, before completing Schedule D.

Related publications and forms.

This chapter refers to several publications and forms that you may need.
The list of forms does not include Forms 1040, 1040A, and 1040EZ. For more
information, you may want to order any of the following:

    Publication 544, Sales and Other Dispositions of Assets

    Publication 550, Investment Income and Expenses

    Schedule D (Form 1040), Capital Gains and Losses

    Form 2119, Sale of Your Home

    Form 4797, Sales of Business Property

    Form 8582, Passive Activity Loss Limitations

Schedule D

Report capital gains and losses on Schedule D (Form 1040), Capital Gains and
Losses. You also use this schedule to figure your limit on capital losses, to
reconcile your Forms 1099─B for sales of stocks and bonds, and to figure your
tax using the Schedule D tax computation. You can use Schedule D─1 as a
continuation schedule to report additional transactions.

Passive activity gains and losses may also have to be reported on Form 8582,
Passive Activity Loss Limitations. In some cases, the loss may be limited
under the passive activity rules. Refer to Form 8582 and its separate
instructions for more information about reporting capital gains and losses
from a passive activity.

Form 1099─B transactions. If you sold property, such as securities,
commodities, bonds, etc., through a broker, you should receive Form 1099─B,
Proceeds From Broker and Barter Exchange Transactions, or an equivalent
statement from the broker. Use the Form 1099─B or equivalent statement to
complete Schedule D (Form 1040).

Report the gross proceeds shown in Box 2 of Form 1099─B as the gross sales
price in column (d) of either line 1a or line 8a of Schedule D, as applicable.
However, if the broker advises you, in Box 2 of Form 1099─B, that gross
proceeds (gross sales price) less commissions and option premiums were
reported to the IRS, enter that net sales price in column (d) of either line
1a or line 8a of Schedule D, as applicable. If the net amount is entered in
column (d), do not include the commissions and option premiums in column (e).
Be sure to add all sales price entries in column (d) on lines 1a and b and
lines 8a and b and enter the totals on lines 1c and 8c. If the gross proceeds
from Box 2 of all your Forms 1099─B differ from the total of lines 1c and 8c,
column (d), attach a statement to your return explaining why.

If the Form 1099─B you receive includes amounts derived from the sale or
exchange of section 1256 contracts or straddles, or from hedging transactions,
see Publication 550, Investment Income and Expenses, for more information
about reporting these amounts.

Form 1099─S transactions. If you sold or exchanged reportable real estate, you
should receive from the real estate reporting person a Form 1099─S, Proceeds
From Real Estate Transactions, showing the gross proceeds from the sale.

"Reportable real estate" is defined as any present or future ownership
interest in any of the following:

1)  Improved or unimproved land, including air space,

2)  Inherently permanent structures, including any residential, commercial,
    or industrial building,

3)  A condominium unit and its accessory fixtures and common elements,
    including land, and

4)  Stock in a cooperative housing corporation (as defined in section 216
    of the Internal Revenue Code).

A "real estate reporting person" could include a mortgage lender, your
broker, the buyer's broker, or the person acquiring the biggest interest
in the property.

If you sell your main home that was purchased or improved with federally-
subsidized financing from a mortgage credit certificate issued by a
state or local government, you may have to include part of the loan in your
income. For more information, see Mortgage Interest Credit in Chapter 36.

Your Form 1099─S will show the gross proceeds from the sale or exchange in
Box 2. Follow the instructions for Schedule D to report these transactions
and include them on lines 1a or 8a as appropriate. The total of your gross
proceeds from Forms 1099─S and 1099─B should equal your total sales price
amounts as reported on lines 1c and 8c of Schedule D. If this is not so, you
should attach a statement to your tax return explaining why.

If the building sold or exchanged was your main home, report the sale on
Form 2119, Sale of Your Home. Follow the Form 2119 instructions to determine
whether you report any gain on Schedule D.

It is unlawful for any real estate reporting person to separately charge you
for complying with the real estate information-reporting requirements.

Other transactions. Enter all sales of stocks, bonds, and real estate
transactions (other than the sale of your main home) on line 1a or line 8a of
Schedule D as applicable, whether or not you actually received a Form 1099─B
or Form 1099─S. Use either line 1d or line 8d of Schedule D, as applicable,
to report gains and losses on other transactions.

If you had gains or losses from the disposition of options, including puts and
calls, see Options under Capital or Ordinary Gain or Loss in Publication 550.

Sale expenses. Add to your cost or basis any expense of sale such as brokers'
fees, commissions, state and local transfer taxes, and option premiums. Enter
this adjusted amount in column (e) of either Part I or Part II of Schedule D,
as applicable, unless you reported the net sales price amount in column (d).

For more information about adjustments to basis, see Chapter 14.

Short-term gains and losses. Gain or loss on the sale or trade of investment
property held one year or less is a short-term capital gain or loss. Report
it in Part I of Schedule D.

You combine your share of short-term capital gains or losses from
partnerships, S corporations, or fiduciaries, and any short-term capital
loss carryover, with your other short-term gains and losses to figure your
net short-term capital gain or loss on line 7 of Schedule D.

Property held for personal use. Gain on the sale or exchange of property held
for personal use and held for one year or less is a short-term capital gain.
Report it in Part I of Schedule D. Losses on sales or exchanges of property
held for personal use are not deductible.

Long-term gains and losses. A gain or loss on the sale or trade of investment
property held more than one year is a long-term capital gain or loss. Report
it in Part II of Schedule D.

You also report the following in Part II of Schedule D:

1)  All capital gain distributions from regulated investment companies
    (mutual funds) and real estate investment trusts.

2)  Your share of long-term capital gains or losses from partnerships, S
    corporations, and fiduciaries.

3)  Long-term capital loss carryovers.

The result from combining these items with your other long-term gains and
losses is your net long-term capital gain or loss (line 16 of Schedule D).

Property held for personal use. Gain on the sale or exchange of property held
for personal use and held more than one year is a long-term capital gain.
Report it in Part II of Schedule D. Loss on the sale or exchange of property
held for personal use is not deductible.

Capital gain distributions. You report capital gain distributions on line 12,
Part II of Schedule D, regardless of how long you have held your investment.
If you do not need Schedule D to report any other capital gains or losses,
enter your capital gain distributions for 1992 on line 14 of Form 1040.

Total net gain or loss. To figure your total net gain or loss, combine your
net short-term capital gain or loss (line 7) with your net long-term capital
gain or loss (line 16). Enter the result on line 17, Part III of Schedule
D. If your losses are more than your gains, see Capital Losses, next. If
both lines 16 and 17 are gains, see Schedule D Tax Computation, later.

Capital Losses

If you have a total net capital loss, you can claim a capital loss deduction.
You must first figure how much of the loss is allowable. Then you must figure
how much of the loss you can deduct in the year of the loss and how much of it
you carry over and use in future tax years.

Figuring your loss. If your capital losses are more than your capital gains,
up to $3,000 of the excess loss is allowed.

If you have both short-term and long-term items, figure your capital loss as
follows:

1)  If you had a net short-term capital loss and a net long-term capital
    gain, your short-term loss is your net short-term capital loss minus
    your net long-term capital gain.

2)  If you had a net long-term capital loss and a net short-term capital
    gain, subtract your net short-term capital gain from your net long-term
    capital loss. This is your long-term capital loss.

Yearly limit. Your allowable capital loss deduction for any tax year is
limited to the lesser of:

1)  $3,000 ($1,500 if you are married and file a separate return), or

2)  Your capital loss, as shown on line 17 of Schedule D.

Capital loss carryover. If your capital loss is more than the yearly limit on
capital loss deductions, you can carry over the unused part to later years
until it is completely used up. When you carry over a loss, it remains long
term or short term. A short-term loss that is carried over to the next tax
year is added to short-term losses that occur in that year. A long-term loss
that is carried over to the next tax year is added to long-term losses that
occur in that year.

You can carry over a capital loss that is more than the amount of allowable
loss to the next year and treat it as if you had incurred it in that year.
When you figure the amount of any capital loss carryover in a later tax
year, you must take into account any deductions for capital losses allowed
in earlier years.

Figuring the carryover. When figuring how much of your capital loss you can
carry over as short term and how much as long term, use your short-term losses
first, even if you incurred them after a long-term loss. If you have not
reached the limit on the capital loss deduction after using short-term
losses, use the long-term losses until you reach the limit.

The amount of your capital loss carryover is the amount of your capital loss
that exceeds the lesser of:

1)  Your allowable capital loss deduction for the year, or

2)  Your taxable income increased by your allowable capital loss deduction
    for the year and your deduction for personal exemptions.

If your deductions exceed your gross income for the tax year, use your
negative taxable income in computing the amount in item (2).

Example. Bob and Gloria sold securities in 1992. The sales resulted in a
capital loss of $7,000. They had no other capital transactions. On their
joint 1992 return, they can deduct $3,000. The unused part of the loss, $4,000
($7,000 - $3,000), can be carried over to 1993.

If their capital loss had been $2,000, their capital loss deduction would have
been $2,000. They would have no carryover to 1993.

Joint and separate returns. If you are married and filing a separate return,
your yearly capital loss deduction is limited to $1,500. Neither you nor your
spouse may deduct any part of the other's loss.

If you and your spouse once filed separate returns and are now filing a joint
return, you must combine each of your capital loss carryovers. However, if you
and your spouse once filed a joint return and are now filing separately, any
capital loss carryover can be deducted only on the return of the person who
actually had the loss.

A decedent's capital loss. Capital losses cannot be carried over after a
taxpayer's death. They are deductible only on the final income tax return
filed for the decedent. The capital loss limits discussed earlier still apply
in this situation. This loss cannot be deducted by the decedent's estate or
carried over to following years.

Figuring your capital loss carryover. Complete Part V of Schedule D to
determine the part of your capital loss for 1992 that you can carry over
to 1993.

Schedule D Tax Computation

For 1992, your capital gains are taxed at a maximum tax rate of 28% even if
you have ordinary income that is taxed at a higher rate. For 1992, the maximum
tax rate on ordinary income is 31%.

To qualify for the 28% maximum tax rate on capital gains, you must:

1)  Have net long-term capital gains only, or

2)  Have net long-term capital gain that is more than your net short-term
    capital loss (your net capital gain), AND

3)  Have taxable income that is subject to the 31% tax rate.

If both lines 16 and 17 of Schedule D are net gains and your taxable income,
as shown on line 37 of Form 1040, is subject to the 31% tax rate, you can
use Part IV of Schedule D to figure your tax.

First complete your Form 1040 through line 37. Then complete Part IV of
Schedule D. If you use Part IV of Schedule D to figure your tax, be sure to
check box c on line 38 of Form 1040 when you enter your tax on that line.

If you have net capital gains and your taxable income (line 37 of Form 1040)
is over the amount shown for your filing status in the following table, you
should complete Part IV of Schedule D.

      Filing Status                                  Amount
      Single                                         $51,900
      Married filing jointly                         $86,500
      Married filing separately                      $43,250
      Head of household                              $74,150
      Qualifying widow(er)                           $86,500

If your taxable income is more than the amount shown for your filing status
in the above table, you can use the following worksheet to compute your tax.

                       Worksheet for Determining Tax
                    If You Have Net Capital Gain Income

    1. Enter taxable income (Form 1040, line
       37) ........................................  __________

    2. Enter the smaller of the long-term capital
       gain or the net capital gain ...............  __________

    3. Subtract the amount on line 2 from the
       amount on line 1 ...........................  __________

    4. Enter the amount shown below for your
       filing status ..............................  __________

           Filing Status                      Amount
           Single                            $51,900
           Married filing jointly            $86,500
           Married filing separately         $43,250
           Head of household                 $74,150
           Qualifying widow(er)              $86,500

    5. Enter the greater of line 3 or 4 ...........  __________

    6. Subtract line 5 from line 1 ................  __________

    7. Figure the tax on the amount on line 5.
       Use the Tax Tables if line 5 is less than
       $100,000. If $100,000 or more, use the
       Tax Rate Schedules .........................  __________

    8. Multiply line 6 by .28 .....................  __________

    9. Add lines 7 and 8. This is your tax ........  __________

Example. Aretha Johnson, a single taxpayer, had 1992 taxable income of
$55,000, including a long-term capital gain of $15,000 on the sale of stock.
She had no other capital gains or losses. Since Aretha's taxable income is
more than $51,900, her maximum tax rate will be higher than 28%. To figure
her 1992 tax, Aretha completes the worksheet as follows:

                       Worksheet for Determining Tax
                    If You Have Net Capital Gain Income

    1. Enter taxable income (Form 1040, line
       37) ........................................    $55,000
                                                      _________
    2. Enter the smaller of the long-term capital
       gain or the net capital gain ...............     15,000
                                                      _________
    3. Subtract the amount on line 2 from the
       amount on line 1 ...........................     40,000
                                                      _________
    4. Enter the amount shown below for your
       filing status ..............................     51,900
                                                      _________
         Filing Status                      Amount
         Single                            $51,900
         Married filing jointly            $86,500
         Married filing separately         $43,250
         Head of household                 $74,150
         Qualifying widow(er)              $86,500

    5. Enter the greater of line 3 or 4 ...........     51,900
                                                      _________
    6. Subtract line 5 from line 1 ................      3,100
                                                      _________
    7. Figure the tax on the amount on line 5.
       Use the Tax Tables if line 5 is less than
       $100,000. If $100,000 or more, use the
       Tax Rate Schedules .........................     11,744
                                                      _________
    8. Multiply line 6 by .28 .....................        868
                                                      _________
    9. Add lines 7 and 8. This is your tax ........     12,612
                                                      _________

Aretha will enter $12,612 on line 38 of her Form 1040.



Part IV. Adjustments to Income

There are two main groups of deductions you can take on your tax return:

1)  Those that are used to figure adjusted gross income, and

2)  Those that are subtracted from adjusted gross income to figure taxable
    income.

The two chapters in this part discuss two of the deductions in the first
group. They are the deduction for alimony you pay and the deduction for
payments to an individual retirement arrangement (IRA). Other deductions in
the first group are the deductions for self-employment tax (see Chapter 23 of
Part V), for self-employed health insurance (see Chapter 22 of Part V), for
payments to a Keogh retirement plan or self-employed SEP (see Publication 560,
Retirement Plans for the Self-Employed), and for a penalty on early withdrawal
of savings (see Chapter 8 of Part II).

You can also write in certain deductions in figuring adjusted gross income
on Form 1040. These write-in deductions are limited to the following:

∙  Amortization of the costs of forestation or reforestation (see
   Publication 535, Business Expenses),

∙  Expenses of certain performing artists (see Chapter 28 of Part V),

∙  Certain required repayments of supplemental unemployment benefits (see
   Chapter 6 of Part II), Form 1040 Instructions

∙  Foreign housing deduction (see Publication 54, Tax Guide for U.S.
   Citizens and Resident Aliens Abroad), and

∙  Jury duty pay given to your employer (see Chapter 13 of Part II).