 Income tax 2023 2024 capital gain or loss get ready and some coffee because we'll have to handle a little perspiration if we're serious about income tax preparation 2023 2024. Most of this information can be found in the instructions for schedule one section of the form 1040 instructions tax year 2023 which you can find on the iris website at iris.gov iris.gov looking at the income tax formula we're focused on line one income remember in the first half of the income tax formula is basically a funny income statement normally income statements having income minus expenses resulting in net income here we have income minus various deductions getting to taxable income with the income line item we would like to have it as low as possible for taxes therefore looking for things that might be exempt from income and also noting that some line items within this category of income might have more favorable tax rates rather than the standard ordinary income progressive tax rates such as qualified dividends and possibly long-term capital gains this is the first page of the form 1040 we're looking at line number seven capital gain or loss it says to attach schedule D if required this is the schedule D where we have the capital gains and losses we'll take a look more at the schedules in a future presentation right now we'll just go through more of what capital gains are this is the form 8 9 4 9 sale and other dispositions of capital assets and then this is going to be a form which is quite common when you're thinking about capital gains for individuals now note that capital gains is a huge topic because it could apply to many different types of sales situations and when you get into the cost or adjusted basis that could have big implications with different types of sales however for individual taxpayers the big thing we think about with the capital gains is going to be the sale of investments such as stocks and bonds those stocks and bonds typically for typical investors are stocks and bonds traded on the stock exchange and they're often compiled into funds such as mutual funds or ETFs and we have to keep in mind as well the investments that are going to be under the umbrella of say a retirement account like a 401k plan or a 403b plan and those funds and stocks that are not under the umbrella of those plans because those plans although using essentially the same types of investments usually mutual funds or ETFs they have different tax implications that's why we put them under the umbrella of some type of retirement account now note that the IRS wants to get reporting from individuals about income first a word from our sponsor yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but but that's okay whatever because our merchandise is is better than their stupid stuff anyways like our CPA six pack shirts a must have for any pool or beach time mixing money with muscle always sure to attract attention yeah even if you're not a CPA you need this shirt so you can like pull in that iconic CPA six pack stomach muscle vibe man you know that CPA six pack everyone envisions in their mind when they think CPA yeah as a CPA I actually and unusually don't have tremendous abs however I was blessed with a whole lot of belly hair yeah allowing me to sculpt the hair into a nice CPA six pack like shape which is highly attractive yeah maybe the shirt will help you generate some belly hair too and if it does make sure to let me know maybe I'll try wearing it on my head and yes I know six pack isn't spelled right but three letters is more efficient than four so I trimmed it down a bit okay it's an improvement if you would like a commercial free experience consider subscribing to our website at accounting instruction.com or accounting instruction.thinkific.com where does the iris go they usually go to the person that is paying because they're the people that get a tax write-off in this case it's a financial institution so if we're investing we're investing with the help of a financial institution therefore they are the ones responsible for issuing the 1099B if there was a sale of stocks and bonds let's say that have a tax implications now oftentimes you might have the same financial institution for your your savings accounts your bank account possibly and your sale your brokerage type of accounts so you might get one form from the financial institution that has dividends income interest income and 1099s for the for the sale of stocks which can be a little bit confusing just to organize your documentation because when you're doing data input into a tax software for example sometimes you want to separate all those things out so that you can check one thing at a time which is a little bit more difficult when everything's kind of combined together but just realize oftentimes they're going to be all combined together now also note that the thing that the financial institution will know for sure you would think for the most part usually is the sales that you made in 2023 because those happen currently they know what the proceeds are for the sale right so we know the sales that happened we know the date uh that they were sold what is often more confusing is going to be the the uh purchase when they were purchased and the the basis of the purchase and there's many things that complicate that situation because for example they might have been purchased before you did business with this financial institution and now you're doing business with a different financial institution there might have been stock splits since you since basically you bought the stock which means now the the basis should be like cut in half you would think and whatnot there might have been an inheritance situation where they were you inherited the stocks or something like that all those things greatly complicate the calculation of the cost or basis most of the financial institutions are getting better at reporting at least an estimated cost or basis but that's often where the question comes in on how much did you purchase them for now also note that if you're dealing with most investors they're not day traders you're not going to have a whole lot of transactions usually from year to year for sales but sometimes you do and if they made a bunch of sales at different dates all throughout the year then you're going to have to summarize that information on the tax return and you might actually add an attachment or something like that possibly to help summarize that information as you break it out on the tax return which we'll talk more about in a future presentation okay short term versus long term capital gains capital gains are characterized based on the duration the asset was held before sale assets sold within a year of purchase are considered short term and are taxed at ordinary income tax rates assets held for more than a year are subject to long-term capital gains tax rates which are typically lower so when we think about capital gains for individuals we usually think about stocks and bonds we could have sold other things right you could have sold anything that's subject to capital gains rates as opposed to ordinary incomes things that you're typically holding on to for longer periods of time might be subject to like capital gain type of situation versus ordinary income but again for normal investors we're thinking about investments usually investments that are outside of the umbrella of an IRA or a 401k plan because those things are typically not going to be sold at least within or before the retirement age right if you sold something that is out that is outside of an IRA or a retirement plan that is going to be stocks or bonds then you could or mutual funds subject to the capital gains now then the question is what are going to be the rates of the capital gains that are going to apply to those sales typically you're going to get favorable rates if it's going to be a long-term capital gain why why might that be the case well one argument for that is that if you held on to stocks for like 10 years and then you sold them at a gain of $100,000 at the end of 10 years that means that you that you that you the gains that you had really accumulated over 10 years but you're recognizing them in one year which will have a big detrimental effect for income tax purposes because it's going to push you into a higher tax bracket due to the progressive tax system and what really happened is you you earned the revenue over multiple years as passive income so therefore it seems like it wouldn't really be fair to have that one lump sum push you up just because you happen just because you decided to realize it in one time period what would that do if if you didn't have a shorter capital gain rule it would cause people to try to plan and never pull the money out because they don't want to get hit with the large capital gains tax that might push them up into higher rates that's one argument for it the other argument just from a from a investment or economic standpoint is that we don't we don't want to try to disincentivize transactions because the transactions are typically the things that help grow the economy so we want to make people's ability to do transactions as fluid as possible and not have the tax code impede on that at least as much as we can note that when we calculate the gain also we're going to have the sales price minus the cost that's going to or the basis the adjusted basis and the sales price usually easy to get the adjusted basis can be difficult so tax rates for 2023 long-term capital gains tax rates can be 0 15 or 20 percent now here's the problem we want to have favorable capital gains rates how do you do that when we have a progressive tax system and everybody's paying different rates depending on how much income they have well you have to have a whole another series of progressive tax rates that are favorable based on income levels right so now we're going to say you know if you have high tax brackets for ordinary income then you might be paying 20 percent which would be favorable for some people and not favorable for lower income people right if you have middle-ranged income then 15 percent is going to be a favorable rate because your marginal or highest tax rate will be above 15 percent and if you're a low-income individual your tax rates are already pretty low from the progressive income standpoint and therefore we have to go down to zero basically to to to have a favorable tax rate in those instances so short-term capital gains are taxed at your regular income tax rates so short-term typically means you bought the stock or whatever it is we're typically thinking stocks and then you sold the stocks or mutual fund or whatever within the same year so in that case it looks like you're doing something more like on a short term basis and not long-term investments more like a business activity which is one argument why it should be taxed at ordinary income rather than capital gains and of course you didn't accumulate multiple gains over a 10-year period in that case and and so the first argument we talked about also does not apply and therefore normal ordinary income rates reporting requirements capital gains and losses are reported on schedule D form 1040 and the form 8949 quote sales and other dispositions of capital assets in quote form 8949 is used to list all capital gain and loss transactions while schedule D summarizes the total gains and losses so the IRS typically we're going to have to list out the gains and losses now if you have a day trader or something like that that can be quite tedious because you might have to list out all the sales that they made which you might then try to summarize if you can to populate the amounts properly that are long-term versus short-term and then possibly add an addendum to the tax return in order to to show the the detail to the IRS which they possibly already have because they probably got that information possibly from the the broker although maybe not all of the detail for that information but the general idea is you're going to give them the detail and then the schedule D is going to kind of combine the information together which actually gets kind of complex because the major groupings of capital gains are going to be short-term capital gains subject to ordinary income long-term capital gains which are subject to these favorable tax rates however what about capital losses if you have losses then remember the iris doesn't like losses because you have you could net out the losses against other gains or other income so when you have losses it actually complicates the situation a bit because what if I have losses from short-term capital gains or what if I have losses from long-term capital gains could I net those losses against the short-term capital gains even though the long-term capital or losses would be taxed at a favorable rate and the short-term would be taxed right when you start to match these things up with these different tax rates you you end up with some actually somewhat complex situations but in any case capital loss deductions so if your capital losses exceed your capital gains you can use the loss to offset up to $3,000 $1,500 if married filing separately or other of other income so if you have losses if you had like $10,000 of capital losses meaning like you bought stocks for $5,000 and or you bought stocks for for $20,000 you sold them for $10,000 you lost $10,000 on the sale well the iris is going to limit the amount of losses you can take in a particular period to $3,000 but and and notice that's generally $3,000 overall unless you're talking about the married filing separately situation we're going to limit it to $3,000 and and then possibly you can move the the losses forward now notice that that loss that you're taking against ordinary income is actually quite nice because the losses that you're that you're taking if they were gains they would have been taxed at the favorable or lower tax rates and the loss that you're taking is actually netting against other income possibly W2 income which would normally be taxed at your highest tax rates your your marginal tax rate or normal ordinary income so that matching can be pretty nice even though losses aren't good right you don't want to have to lose money on your stocks but if you do lose money then you might be able to take that loss at ordinary income rates lowering basically like your W2 income for example ordinary income and and so that could be useful so if your total net capital loss is more than the limit you can deduct you can carry over the unused part to the next year so do you lose what do i lose the rest of the loss no typically you can carry it forward to next year and if you don't have any other thing that you can take you can take another 3000 next year and keep on rolling it forward notice that when you have a lot of sales of stocks and especially when you have losses that are carrying forward whether they be in a well net operating losses or capital losses it's useful from a logistics perspective to use the same software from year to year and if you're a tax preparer taking on a new client you might want to think about putting the prior year tax return into the prior year software which might cost you something to do but make it easier for the software to guide you and help you as you roll over the information from the prior year to the current year hopefully having the loss rollovers populating properly so exclusion and exemptions certain exclusions may apply such as the exclusion of gain from a sale of your primary residence so notice stocks are not the only thing that could result in capital gains if we sell other personal items such as a home usually the home would be a capital type of asset that we sell and the home is somewhat unique of an asset in that it often goes up in value over time so unlike like equipment or a car for example or something like that and therefore we were likely to have a gain on the sale of the home but the irs usually has an exclusion is the general concept which we might talk more about later with regards to the specific case of a home the general rationale for that you would think would be that the home is such a huge investment for individuals that the iris also wants a tax benefit for incentivizing home purchases and whatnot which might be lobbyists from the real estate area but but they also don't want to don't want to cause people to be stuck in a particular area because of of tax implications right so if you have this huge capital gain that once again you're going to be paying large amounts of taxes on then it might detour people from from moving in situations which could kind of stagnate the economy and that the idea is that we want the taxes to generate tax revenue without influencing people as much as possible that's my idea of it they might want to influence people with because they got housing lobbyists or whatnot but you don't want to but but you want people to do what they want to do and have the have the taxes have as minimum an impact as necessary in order to get the money you need to to pay the military basically so we could be protected that's basically my thought anyway so up to 250 000 for single filers and 500 000 for married couples filing jointly providing separate conditions are met we'll talk more about that later 1099 forums financial institutions will issue form 1099 b or a similar statement to taxpayers who have sold assets during the year detailing the sales price and cost basis of sold assets which is necessary for completing the form 894 night in schedule d now again the sales price usually pretty straightforward the cost basis sometimes more complex they're getting better at that but it's not always perfect capital gain or loss if you sold capital asset such as stock or bond you must complete and attach form 894 9 schedule d so exception you don't have to file form 894 9 or schedule d if you aren't deferring any capital gain by investing in a qualified opportunity fund and both of the following applies so this is somewhat of an unusual situation you have a capital you have capital losses and your only capital gains or capital gain distributions from forums 1099 div box one box to a or substitute statements and none of the forms 1099 div or substitute statements have an amount in box to be unrecaptured section 1250 gain box to see section 1202 gain or box 2d collectibles 28 percent gain okay exception you must file a schedule d but generally don't have to file form 894 9 if exception one doesn't apply and you aren't deferring any capital gain by investing in a qualified opportunity fund or terminating deferral from an investment in a qualified opportunity fund and your only capital gains and losses are capital gain distributions so now the capital gain distributions we saw sometimes they're on the 1099 dividend form so we saw that with the cat with the with the dividend form if you invest in stocks you're basically an owner of of the company although a very small percentage owner of the company and you might have a situation where there there are distributions from the company that aren't coming from the the they're not coming from the retained earnings possibly but a return of investment in which case it's going into the the capital investment instead of out of retained earnings in which case it might be reported on a 1099 d and you might have a capital gain distribution in that situation reported on a 1099 div which could result in capital gains but maybe you don't have to file the form 894 9 in that case also mutual funds are pooling money together and then the mutual fund within the mutual fund they might sell stocks and bonds resulting in capital gains within the mutual fund even though you did not sell the mutual fund which could result in a situation where you have like capital gains again reported but maybe you don't need to report in that case the form 894 9 a capital loss carryover from 2022 so in this case you've got capital losses but you don't really need to list them out because remember the form 894 9 is listing out all the sales transactions you didn't have any because they happened last year and you're just carrying over the fact that you have a capital loss that you might be able to take against ordinary income in the current year a gain from form 2439 or 6252 or part one of form 4797 a gain or loss from form 4684 6781 or 884 I'm not going to go into the detail of all those forms right now but you can look them up if you so choose we might touch on them in future presentations a gain or loss from my partnership s corporation a state or trust so if you have a gain from these other entities then a partnership s corporation these could be passed through type of entities meaning you have to file a separate tax return for them but then the income is going to flow through to your tax return individual income tax return and that will be done with the use of a k1 form which is kind of like the reporting documentation from the separate entity separate legal entity s corporation partnership or separate entity and then it's going to be flowing through to to your individual tax return in which case you might have sales that happen that are reported on the partnership return or the s corporation return and therefore you might not need the form 8449 because the iris would go to the partnership or s corporation to see the detail but rather just be pulling in the capital gains and losses in that case from the k1 gains and losses from transactions for which you received a form 1099 b or substitute statement that shows basis was reported to the irs the qo f box in box three isn't checked and you don't need to make any adjustments in column g of form 8449 or enter any codes in column f of form 8449 okay if exception one applies enter the total capital gain distributions from box 2 a of forms 1099 div online seven and check the box on that line if you receive capital gain distributions as a nominee that is they were paid to you but actually belong to someone else report online seven only the amount that belongs to you so once again you have that kind of weird situation where you're there you're getting the 1099 but they kind of belong to someone else which we have to be careful of because if that were the situation the 1099 is going to tell the irs that basically we have income so include a statement showing the full amount you received and the amount you received as a nominee so what do we have to do there we have to somehow inform the irs hey irs here's the 1099 here's the full amount that you received but only part of it is actually taxable to me so see the schedule be instructions for filing requirements for forms 1099 div and 1096