| Capital Gains & Losses / Capital gains and losses of individuals: an overview |  |
|||
|
Several key rules and processes
apply. First, you must separate your
long-term gains and losses from your short-term gains and losses.
Long-term, for these purposes, means gains or losses from investments
which you held for more than a year. Gains and losses from investments
held for one year or less are short-term. In addition, you must separate
your long-term gains and losses into three rate groups: (1) the 28% group, consisting of: •
capital gains and losses from collectibles (including works of
art, rugs, antiques, metals, gems, stamps, coins, and alcoholic
beverages) held for more than one year; •
long-term capital loss carryovers; •
section 1202 gain (gain from the sale of certain small business
stock held for more than five years that's eligible for a 50% exclusion
from gross income). (2) the 25% group, consisting of 'unrecaptured
section 1250 gain'—that is, gain on the sale of depreciable real
property that's attributable to the depreciation of that property (there
are no losses in this group); and (3) the 20% group (10% in the case
of gain that would otherwise be taxed at 15%), consisting of long-term
capital gains and losses that are not in the 28% or 25% group (that is,
most gains and losses from assets held for more than one year). Within each of the three groups
listed above, gains and losses are netted to arrive at a net gain or
loss. The following additional netting and
ordering rules apply: (1) Short-term capital losses
(including short-term capital loss carryovers) are applied first to
reduce short-term capital gains, if any, otherwise taxable at ordinary
rates. If you have a net short-term capital loss, it reduces any net
long-term gain from the 28% group, then gain from the 25% group, and
finally reduces net gain from the 20% group. (2) Long-term capital gains and
losses are handled as follows. A net loss from the 28% group (including
long-term capital loss carryovers) is used first to reduce gain from the
25% group, then to reduce net gain from the 20% group. A net loss from
the 20% group is used first to reduce gain from the 28% group, then to
reduce gain from the 25% group. If, after the above netting, you
have any long-term capital gain, the gain that's attributable to a
particular rate group is taxed at that group's marginal tax rate (28%
for the 28% rate group, 25% for the 25% rate group, 20% for the 20% rate
group). However, if, after the above
netting, you're left with short-term losses or long-term losses (or
both), you can use the losses to offset ordinary income, subject to a
limit. The maximum annual deduction against ordinary income for the year
is $3,000 ($1,500 for married taxpayers filing separately). Any loss not
absorbed by the deduction in the current year is carried forward to
later years, until all of it is either offset against capital gains or
deducted against ordinary income in those years, subject to the $3,000
limit. If you have both net short-term losses and net long-term losses,
the net short-term losses are used to offset ordinary income before the
net long-term losses are used. Some planning suggestions.
Since losses can only be used against gains (or up to $3,000
additionally), in many cases, matching up gains and losses can save you
taxes. For example, suppose you have already realized $20,000 in capital
gains in Year 1 and are holding investments on which you have lost
$20,000. If you sell the loss items before the end of the year, they
will 'absorb' the gains completely. Alternatively, if you wait to sell
the loss items in Year 2, you will be fully taxed on Year 1 gains and
will only be able to deduct $3,000 of your losses (if you have no other
gains in Year 2 against which to net the losses). Another technique is to seek to
'isolate' short-term gains against long-term losses. For example, say
you have $10,000 in short-term gains in Year 1 and $10,000 in long-term
losses as well. You're in the 39.6% tax bracket in all relevant years.
Your other investments have been held more than one year and have gone
up $10,000 in value, but you haven't sold them. If you sell them in Year
1, they will be netted against the long-term losses and leave you short-
term gains to be taxed at 39.6%. Alternatively, if you can hold off and
sell them in Year 2 (assuming no other Year 2 transactions), the losses
will 'absorb' the short-term gains in Year 1. In Year 2, the long-term
gains will then be taxed at only 20% (unless the gains belong in the 25%
or 28% group). Family tax planning opportunity. Given the 10% rate for low bracket taxpayers, if you have appreciated stock or other capital assets that you are thinking of selling, you may wish to consider transferring the asset to children over 13. To the extent their other taxable income is below the 28% tax bracket amount ($27,050 for 2001), they can take advantage of the low (10%) rate for net capital gains. (For children 13 or under the 'kiddie tax' rules can cause the child's income to be taxed at the parent's (higher) tax rates.) |
Home
Tax topics
|
|||