 Income tax 2023-2024. Capital gain or loss tax software example. Get ready and some coffee because we're gonna stop the tax man in his tracks with income tax preparation 2023-2024. 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 trust me I'm an accountant product line. Yeah it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our form 1040 example problem using Lassert tax software. You don't need tax software to follow along but it's a great tool to run scenarios with. You can also get access to forms, schedules, reports, instructions at the IRS website irs.gov irs.gov starting at our normal starting point with our taxpayer Adam tax man just trying to avoid a dang tax man living in Beverly Hills 90210. We have a single file or to start off with no dependence starting with W-2 income of the nice round 100,000 to start off with standard deduction 13850 resulting in taxable income 86150 we can see that as well in our income tax formula in Excel 100,000 13850 given the taxable income 86150 the tax calculated 14266 to start off with we go back on over to the software that's on page two the 14266. All right let's go back to page one. Our point of focus is online number seven. I'm gonna put a little check by it. That's where we have the capital gain or loss where we would attach the schedule D. Now many things that you sell might qualify for capital gains type rules. However for individual income taxpayers were usually thinking about sales of say stocks bonds that are sold on a stock exchange or possibly mutual funds or ETFs which are basically compiling money together and purchasing stocks and bonds usually which are traded on some type of stock exchange. That means that we're usually going to receive documentation like this where we have the 1099B. If there's any questions about this data input form in terms of any of the sales within it we can typically go to the IRS and look at the IRS website and look for the instructions for the 1099B which will provide further detail. Now also just realize when we think about the investments in stocks and bonds we might be putting investments in stocks and bonds that are not underneath the umbrella of something like a retirement account or some other kind of tax structure that has tax benefits and restrictions related to them and we might have some investments that are under those umbrellas resulting in different tax implications. They're both using the same investment tools which are typically invested through financial institutions. So for example if you have a 401k plan on IRA or something like that you're still going to be investing typically in stocks and bonds but under the umbrella of this IRA or 401k plan which actually restricts you from taking the money out because you could be penalized but also gives you tax benefit which means that the growth in the funds might be tax-free and you might have a tax benefit when you put the money in. Now typically you're not going to have reporting of income of the items that are underneath the umbrella of a retirement account because you're not usually selling those items and the income related to dividends and interest are typically possibly deferred until the point in time that you take the money out. If you have stocks and bonds that are invested outside of the umbrella of an IRA or some other type of tax-favored account which many people will because you're going to want to have some money that you can get a hold of at least fairly shortly and so you might invest in stocks and bonds that are outside of the umbrella that is when you if you buy and sell those stocks then you could have the capital gain situation. So note that when you invest in stock or bonds the idea would be that you can get paid through interest in which case the financial institution would give you a 1099 INT unless it's under the umbrella possibly of some type of retirement account. You might have dividend income which is the company giving money out that they have earned in the form of dividends similar to a draw to the owners the shareholders in which case you would get a 1099 div or you might have the stock go up in value and then sell the stock in which case you would have income in the form of capital gains capital gains being the most complicated to report on our tax return because we have to realize the gain amount not the sales price. So the sales price will be easy but the basis what we bought it for or the adjusted basis sometimes will be complex to determine and and we're going to need that in order to calculate the capital gains. So what's on this form we've got the description of the property also note that this form might look a little bit different because when you get this information from a financial institution they might be reporting all of these things so you might get a 1099 dividend a 1099 interest and 1099 B from one institution because that's where all your investment financial information is. So it should mark though that this is the 1099 B part of it and the box numbers should be the same therefore if you have any questions about the boxes on the form you can go to the IRS website look at the instructions for the form 1099 B and get further information there. Alright so we have the description of the property this could be problematic the description of the property because you might have sold a bunch of different stocks if you're working with like a day trader or something like that in which case you're going to need a whole another schedule breaking out the description of the property but most of the time they will be able to break it out between short term sales and long term sales which are the major two categories that have a tax implication and then you might be able to attach the sub schedules possibly as an addendum to the return to give them more information. Alright so the date acquired this is often a difficult date to come up with because they're getting better and better at it but you might have bought it a way long time ago at a different financial institution and so it's going to be it could be difficult to get the date acquired on it. It also could have stock splits and stock dividends and all that kind of stuff which makes the date acquired a little bit tricky. The date sold is easy because you sold it in 2023 in this case fairly recently so we know that date and the financial institution should be able to get that correct. The proceeds the amount that you sold it for that should be easy that should be correct the financial institute should have that the key part the cost or basis the institutions are getting better at reporting a cost or basis but there are many situations where that can still be quite complex because like I say you might have you might have the stocks before the current financial institution was there you might have stocks and there are stock splits or stock dividends resulting in a change to the basis of the stocks that you have even though you didn't buy more stocks you might have inherited some stocks so there are many times with where this component is a little bit tricky to come up with. So a crude method discount so a crude method discount wash sale loss disallowed so I'm not going to go over each one of these items we're going to touch on a few of them if you have questions about any of these line items you can go to the instructions for more detail short term gain or loss long term gain or loss most of the time the financial institutions will be able to break out if it's short term meaning you sold it within less of a year of purchase versus long term those have the significant tax implications of either favorable tax rates capital gains rates versus the ordinary income rates. Check if proceeds from collectibles or QOFs there could be different circumstances for collectibles such as jewelry and whatnot federal income tax withheld typically you're not going to have withholdings from the sale of of stocks but if they sold a lot of stocks and they think that it's going to have an impact on their on their taxes that they owe they might have withholdings on the stocks or you might need to change your withholdings for your W2 income or on your other distributions from like IRS or 401k plans or make estimated tax payments to make sure that you're up to date on the withholdings. Check if non covered IRS to report to IRS gross proceeds net proceeds. Now so you might be thinking what are the proceeds are they including are they are they gross or net of the cost or basis to usually going to be gross of the cost or basis and then are there going to be any expenses that of the trade are they gross or net of the expenses of the trade that were taking place. Check if loss is not allowed based on a mountain line 1a profit realized unrealized profit on open contracts to check if the IRS reported to the IRS and then bartering and then you got your state information. So the major stuff is right up top here description date acquired cost or basis and the date sold. Okay so we're looking here let's go into the data input and just add one and see how it works. So we're going to go and say that we have income. It's going to be a distribution. So we'll say distribution schedule D and I'm just going to say it's from stocks. So we'll say this is you know 10 shares of stock a generic and we're going to say it's long term. That's going to be the most common to start off with. So let's say it was purchased 0 1 0 1 2 0. So it's over a year old and then the date sold sometime in the current period 0 6 30 2 3 and the sales price we would get that from our 10 99 be hopefully let's say we sold it for 10. Let's say we sold it for 12,000 and the cost or basis what we purchased it for or the adjusted costs 2000. And so then we're going to keep it at that and then if there were expenses that were not included then that's when you might have the expense item here but I'm going to keep it at this for now. Let's pull that over and then if I scroll down we can see here that we have then the 10,000 that pulled into line number 7 and then we have the schedule D that has now appeared where we have the capital gains and losses part one of the schedule D is the short term capital gains and losses where we have the proceeds the cost and then the gains and losses hours was long term. So therefore we're looking at part number 2 here are our proceeds of the 12,000 the cost of 2000 gives us the 10,000 of the gain that is pulling over to page one. Now note that form 8 9 49 is not being populated in the software in general because the IRS has the information basically from the 10 99 be that has been included. So we didn't have any and so we'll take a look at a situation that has the form 8 9 49 included shortly. But we can see that we have the long term capital gain that pulled into the form 10 40. So that increases our income to 110 and then we've got the 13 8 50 same standard deduction gets us to the 96 150 page to calculate in the tax. But the tax gets more complicated now because we're going to have the favorable tax rates for the long term capital gains. You can see you have a much more complex scenario with regards to the tax calculate calculation other than just the progressive tax rates and it's trying to give a more favorable tax rate to the income item here. So this is where it gets confusing because we typically rely on the software to do the tax calculation and we have to be aware that this 10,000 being long term capital gains is providing a tax benefit because it's being taxed at rates lower than ordinary income, which we can't see unless we actually drill down on the tax calculations here. So let's see it in our Excel worksheet just to analyze it a little bit there as well. So I'm going to add another schedule. Let's call it schedule D. So I'm going to add another schedule and it's going to say plus double click schedule D. And then I'm going to click on the whole thing. Right click format ourselves, make it currency negative numbers bracketed, no dollar sign, no decimals. Okay, I'll make this larger. And I'm just going to make two broad categories, long term capital gains. And in which case we're going to have let's say the date, the proceeds, the basis or costs. And that's going to be the gain or loss. These are my headers. So I'm going to make this black and white. Let's go up top home tab. Nope, not file. Where am I going? And we're going to go to do font group. Let's make it black and white. And then maybe wrap this one. Let's wrap that one. And let's make this centered. And then the date area, I'm going to make home tab numbers, make it a date short date thing. And then I'm going to say, I should have to date. Well, let's say date. Actually, let's just not put the date. I'll just say generically, that these are going to be a long term. Let's put a description instead of a date. Let's put description. Descript. Chun boom. So I'm going to say this was stock one or a I called it 12,000. And we purchased it 12,000 for 10,000. Therefore, proceeds minus basis is 2000. And that's what we have. I'm going to select the whole thing, home tab font group, put some bold to it. And then we might have multiple items here. So I'm going to select a few cells, home tab font group, put some brackets around it. I'm going to make it blue. And then I'm going to copy this same thing for short term. I'll put the long term first because I think it's more common. And then short term capital gain. And I should put loss or loss. And then I'll delete this and then capital gain or loss. And then I'm going to say this will be the total. Let's add one more here. And then I'm going to format it like the one below it, or clear formatting. And then I'm going to say this will be a total long term capital gains loss or loss. And I'll sum this up outside here. And this side is going to be a copy of this. This pasted here. And I'll say this is the total short term, short term. And then I have the total capital gains loss will be the sum of those two. Okay, so I know I did that kind of messily. But I don't want to spend too much time on Excel. But the bottom line is we recalculated it kind of double checked it here. And I'm going to pull that let's do a review on the spell check while I'm here. Wow, is that can't be right? It got all right. Let's go back to our first tab. I'm going to double click on the income line, go to the end of it and say we're going to say plus. Now this is including stuff from this sheet, the income, the schedule one, the schedule C and now the schedule D. The bottom line of the schedule D is going to feed in here to our income and something went wrong with the schedule D. I wanted to be 2000 basis. So that we have 10,000 of income, which pulls into here 110,000 13,850. Now is the calculation. Now before we had income of this was 14266. We have taxable income 96150. This was the tax. What is what is will cert calculate the tax to be now 15766 after that change? So 15766. So the difference in the tax because of that gain is 1500. So so we're gonna say okay and what we had we had a gain of 10,000. So what's the percent this divided by this? Well, hold on a sec. This divided by this is the percent that they applied to that $10,000 change, which is 15%, which is favorable, right? Because if I go back on over here and look at my tax summary, my highest tax rate is 22%. So we got a favorable tax rate. So that's what I mean like it's it's not as easy to see unless you kind of look into the tax calculation, which which is usually we're dependent on the computer to a large degree to calculate. But the fact that there's a different capital gains rate could lead to myriad a myriad different kind of tax planning concepts and strategies to try to get you know, more advantage of the lower tax rate rather than the ordinary income tax rate. Alright, so let's contrast that to like to a situation where I would have to have a form 8, 9, 4, 9. So let's go back on over and let's pretend that the expenses were not included in in the in in the sales price. So therefore, we had the expenses of the transaction. I'm going to put a 20 here. And that's going to complicate the transaction a bit. So if I go back on over to my forms, now you can see that we have the form 8, 9, 4, 9 has populated, because now you've got the 12,000 the 2000. And then we had to populate this amount this adjustment of the $20, which results in the 9,009 850. So now we have something that basically isn't on the on the 1099 that the IRS has. And that's why we have to basically have this other reporting form so that we can show the detail of that transaction, which then pulls into the schedule D. So there's the information on the schedule D. And then of course that pulls in to the 1040. Alright, we've seen that scenario. Let's go back and let's delete that again. And let's contrast this to a short term. So we had a long term. And let's say we also had some stocks, let's say 20 stocks of stock B that were short term sales. So let's say we purchased them in 2023, 010123. And we sold them in 2023 06323. And the sales price here, let's say was 20,000. And the cost, let's say was was 16,000. Alright, so now I'm going to go back on over and say, Okay, what happens with that? Well, now we've got our schedule D. If I scroll up schedule D. Now we've got the short term part one is at the 20,000 minus the 16 we have a 4000 gain that we need to realize. And we've got on the long term, the 12,000 and the 2000, giving us the 10,000 difference. The total the total is 10,000 for the long term capital gain. And then we have 14,000. If we combine them together, what then is going to flow through to the form 1040? We're going to see the 14,000 short term and long term flowing through. And that results in 101 50. If I pull that into page two, now we're at the tax of 16,640 16,646. So let me do another scenario just with short term. So I'm going to go back on over let's delete the long term. And let's do the short term just in the same context of it being sales 12,000 basis 10,000 basis 2000. So now we have we have the same gain, but it's all short term. So I'm going to go back and say, Okay, so schedule D. Now it's all short term. Instead of long term, I have the same 10,000 of gain, it still pulls into the form 1040. So here it is pulling into the 1040 10,000. And we get the same taxable income 96 150. But the tax calculation is now 16 482, as opposed to what we had before. So now it's at 16 482, where the last game got us to 14266. So the difference between those two this time is this minus this, well, and then this is a let's this format paint this and go Okay, actually hold on it before it was at it was at this. So now I'm at this minus this. So now it's another 2216. And I added 10,000. So we're gonna say all right, what's the rate this divided by this? If I percentify it, hold on, I did that backwards this divided by this is going to be a rate of 22%, which is the ordinary income tax rate rather than the favorable 15% because it's short term. So if I can see that I could see that in my tax summary here. So now it took it might have pushed us up to another bracket, but it took the larger rate here, the ordinary income rate rather than the rather than the favorable rate of the 15%. Okay, another thing just to note logistically, if they sold a whole bunch of stocks, then they're probably going to summarize it between short term and long term. And you might be able to add like an addendum possibly to the tax return. Otherwise, you'd have to list them all out, right? So meaning if they sold hundreds of stocks, you would have to basically list out all of the stock sales that happened individually here, and then make sure that your totals line up and pull in correctly. Now, maybe you don't, maybe it would be easier to do to just try to summarize the stock sales that are short term versus long term. So the tax will be calculated correctly and see if you can add say an addendum which would give the information necessary for the further detailed needed by the government. So for example, you might in this software, you might say summary, summarize from attachment, and then you might add an attachment which possibly you can do here in this software by having electronic filing. And then you add the PDF attachment up top and possibly adding the more detail in that way, which could basically save time. So you might want to look into that in a little bit more detail if it applies, because it can reduce some tedium of just basically entering a bunch of these transactions. So for example, you might summarize it by saying that you know, this is the Vanguard, let's say it was from the financial institution, Vanguard. And I'm going to say long term, or I'll just abbreviate it with long term description, Vanguard, long term sales. And then I'll say this was from one to two. And then we'll say the starting point here was and if I put a negative in this software, it actually will vary the date. So I'm going to put a negative and then just make sure it's more than a year old. So it's long term. That's what long term means. And then I'm going to say it was sold at some point in 2023. So again, I'm putting a negative because it's going to be various dates because I might have sold I might have bought them on various dates, but they were all a year old before I sold them right because they're all long term and then I sold them on various dates, but they were all sold in 2023 and the date extended beyond a year. And then I could put something like okay, it was 12,000 2000 cost the total and then summary from attached statement. And then boom, boom, boom, and then I can add the next one, which would be Vanguard, long term, Vanguard, long term sale. Or this is this would be the short term, short term to do it. And then we'll say Vanguard, short term. And then I'm going to say negative one, one sometime in two, three, they were sold in the current year or within a year and then negative 0632 3 and we'll say that we sold these for 20,000 we bought them for 15,000 and attached statement. So let's just see what that looks like. So if I pull that on over, then on the schedule D. Now we've got the summary information for the short term 20,000 minus 15 is 5,000. And then the summary statement, the 12,000 minus the 2000 is 10,000. And then on page two, we've got the 15,000, which pulls into the form 1040 15,000 and so on. And then you can see if you can get that PDF attached that that possibly could show all the detail, which possibly might be provided from your financial institution, given the all the detail of the short term and long term sales. Okay, so what about losses? So if I had losses, let's go back on over. And let's say we're doing the long term again, I'm going to delete the short term for now. And say if we had losses, let's say we had 12,000, and then we bought them for 10,000. So now we're going to have a loss. So I'm going to go back on over and go, Okay, to do it. And so if I go to the schedule D. So now long term, we bought them for 12,000, we sold them for 10,000, we have a loss of 2000. That is also going to pull into the form 1040. I have 100,000 of income. Therefore, I'm, you know, I have the wages to take the loss. I'm sorry, did I have income again? What did I do here sales price? We bought them with the cost is 20,000. Let's say. Alright, let's do that again. Schedule D. So now we have an $8,000 loss. And that pulls into the 1040. So now we have an $8,000 loss. Even though I have wages, they're limiting me to the loss of $3,000 bringing the taxable income to 97. Do I lose the rest of it? I shouldn't because it should be able to roll forward to future periods. I had 8,000 before I should be able to roll it forward to the future. So I have the 83 150 taxable income page two calculating. Now is it going to hit me at the loss with the lower rates? No. Typically I get the loss at the ordinary income tax rates, which is great. So so that so that part is good. The fact that they limit the losses that I can take against my other income is problematic. But the fact that that they're not like like saying that my losses have to be taxed at the lower rates because their losses, they're good. I want the losses to be netting out against my highest tax bracket, which is in essence, you know, the 22. But I'm limited to only the 3000 of the losses. And then I can generally carry forward the losses that I didn't take this year to future years. And we can see that in our worksheets over here, we have capital loss carryover worksheet. And then you can see basically you had the loss of the 8000 and 3000 was deductible. You have 5000 long term capital loss carryover to 2024. What happens in 2024? Well, if you had capital gains in 2024 to net out against the losses, you might be able to take the full 5000 netting out against the gains. If you don't have any capital gains, then it's going to net out against the ordinary income but be limited once again to the $3000. Now you can see how this gets a little bit messy, right? Because like if I had capital gains next next year, then I would I don't really want to net out the 5000 against the capital gains because the capital gains are being taxed at lower tax rates. What I want to do is net out the the these losses against ordinary income, which are taxed at the higher tax rates. You see, so so you end up with these kind of funny tax planning types of situations with this, even though you have fairly straightforward scenarios here. Well, we didn't get the loss this year, we're going to take it next year. But there's a difference between the benefit of the losses if I get to take it against the ordinary income rates versus if I take it against the capital gains rates. So next year, what happens? Well, if I had capital gains, then I'm going to have to net out the losses against the capital gains, which means I'm lowering the income that are being taxed at the favorable rates as opposed to the income that are being taxed at the higher rates and so on and so forth. So you can get into like tax planning strategies on your on your sales and how you're going to be allocating your losses possibly to maximize the losses. Obviously, if the loss was a short term loss, then then both the gains and losses would be at the ordinary income tax rates. And again, if you had short term capital losses, they could be netted out against long term capital gains possibly, which which what you would like to do is net them out against the ordinary income. So that's the general idea with the losses. Now let's go back to the schedule D. So so it actually gets a little bit confusing when you get into the rules then of netting out losses against each other and then applying out whether it's going to be ordinary income rates or capital gains rates. So I'm not going to go into it. And I'm not going to look at all the different details at this point in time, although it's kind of interesting and fun to do. But you could have a carryover from prior periods as well in terms of the capital gains. So let's say let's say that you had then right here a long term capital loss carryover. Now if you had a carryover of a loss, then I would recommend that you're doing a return that's more complex. And therefore instead of just trying to populate the return in the current software without transforming it from the prior software, I would recommend actually doing the data input in the prior software so that you can get the return to mirror what you have possibly on paper, and then basically roll that return forward so that these carryovers will will will populate properly for you. But if I had a carryover from the prior period, I can say it's a long term carryover. Let's say it was 10,000. And I'm going to bring it back in. So now you can see that we have the loss of the current year plus another 10,000 loss, 18,000, it's still going to limit it to 3000 for the current year. And the rest of it's going to basically roll forward once again with that one. Now we also saw that you could have like gains that are populated from like dividends. So we saw that before like if you had a 1099 dividend, and let's say that this was from 1099. And you're going to say that the ordinary dividend was 1000 1000 qualified. And then you had a capital gain distribution of 2000 or let's say I'm using the same numbers 3000 13,007. Okay, let's pull that over. That'll be one that'll pop out. We're going to go into schedule D. So so now you've got this 13,007, which can confuse things because you're going to be like, I'm trying to add up the sale of my stocks. And then this number just got thrown in there. Where did it come from? Well, it came from the 1099 div that had a capital gains distribution. So so when you organize your your documents, you have to take that into consideration that you might have 1099 divs that have an effect on the schedule D as well as other flow through entities like an S corporation or a partnership, which might have K ones that are also flowing through that could have capital gain impacts that are flowing through with them as well.