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Tax Chapter Determination; Personal and Dependency Exemptions; An Overview of Property Transactions
Individual Income Taxes
Copyright 2009 Cengage Learning Individual Income Taxes C3-1
Tax Formula (slide 1 of 2)
Income (broadly conceived) Less:Exclusions Gross Income Less:Deductions for AGI Adjusted Gross Income (AGI) Less:The greater ofTotal itemized deductions or the standard deduction Personal & dependency exemptions Taxable Income
FIGURE 31
$x,xxx (x,xxx) $x,xxx (x,xxx) $x,xxx
(x,xxx) (x,xxx) $x,xxx
C3-2
Individual Income Taxes
Tax Formula (slide 2 of 2)
Tax on taxable income (see Tax Tables or Tax Rate Schedules) Less: Tax credits (including income taxes withheld and prepaid) Tax due (or refund) $ x,xxx (xxx) $ xxx
FIGURE 31
Individual Income Taxes
C3-3
Income -Broadly Conceived
Includes all the taxpayers income, both taxable and nontaxable
Essentially equivalent to gross receipts
It does not include a return of capital or receipt of borrowed funds
Individual Income Taxes
C3-4
Partial List of Exclusions from Gross Income
Accident insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (for coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid on death Meals and lodging (if furnished for employers convenience) Military allowances Ministers dwelling rental value allowance Railroad retirement benefits (to a limited extent) Scholarship grants (to a limited extent) Social Security benefits (to a limited extent) Veterans benefits Welfare payments Workers compensation benefits
Exhibit 3-1
Individual Income Taxes
C3-5
Gross Income
The Internal Revenue Code defines gross income broadly as except as otherwise provided . . . , all income from whatever source derived Gross income does not include unrealized gains
Individual Income Taxes
C3-6
Partial List of Gross Income Items
(slide 1 of 2)
Alimony Annuities (income element) Awards Back pay Bargain purchase from employer Bonuses Breach of contract damages Business income Clergy fees Commissions Compensation for services Death benefits Debts forgiven Directors fees Hobby income Interest Jury duty fees Living quarters, meals (unless furnished for employers convenience) Mileage allowance Military pay (unless combat pay) Notary fees Partnership income Pensions Prizes Professional fees Punitive damages
Exhibit 3-2
Individual Income Taxes
C3-7
Partial List of Gross Income Items
(slide 2 of 2)
Dividends Embezzled funds Employee awards (in certain cases) Employee benefits (except certain fringe benefits) Estate and trust income Farm income Fees Gains from illegal activities Gains from sale of property Gambling winnings Group term life insurance, premium paid by employer (for coverage over $50,000) Rents Rewards Royalties Salaries Severance pay Strike and lockout benefits Supplemental unemployment benefits Tips and gratuities Travel allowance (in certain cases) Wages
Exhibit 3-2
Individual Income Taxes
C3-8
Deductions - Individual Taxpayers
Individual taxpayers have two categories of deductions:
Deductions for adjusted gross income (AGI) Deductions from adjusted gross income
Individual Income Taxes
C3-9
Deductions For AGI (slide 1 of 2)
Sometimes known as above-the-line deductions
On the tax return, they are taken before the line designating AGI
Individual Income Taxes
C3-10
Deductions For AGI (slide 2 of 2)
Deductions for AGI include:
Ordinary and necessary expenses incurred in a trade or business One-half of self-employment tax paid Alimony paid Certain payments to an IRA and Health Savings Accounts Moving expenses Fees for college tuition and related expenses Interest on student loans The capital loss deduction, and Others
Individual Income Taxes C3-11
Adjusted Gross Income (AGI)
AGI is an important subtotal
Serves as the basis for computing percentage limitations on certain itemized deductions such as
Medical expenses Charitable contributions Certain casualty losses
e.g., Medical expenses are deductible only to the extent they exceed 7.5% of AGI
This limitation might be described as a 7.5% floor under the medical expense deduction
Individual Income Taxes C3-12
Deductions From AGI (slide 1 of 3)
Deductions from AGI include:
The greater of:
Itemized deductions, or The standard deduction
Personal and dependency exemptions
Individual Income Taxes
C3-13
Deductions From AGI (slide 2 of 3)
A partial list of itemized deductions includes:
Medical expenses (in excess of 7.5% of AGI) Certain taxes and interest Charitable contributions Casualty Losses (in excess of 10% of AGI) Deductions for expenses related to
The production or collection of income, and The management of property held for the production of income
Individual Income Taxes
Certain miscellaneous itemized deductions (in excess of 2% of AGI)
C3-14
Deductions From AGI (slide 3 of 3)
The standard deduction is the sum of two components:
Basic standard deduction
Amount allowed is based on taxpayers filing status
Additional standard deductions
Available for taxpayers who are
Age 65 or over, and Blind
Two additional standard deductions are allowed for a taxpayer who is age 65 or over and blind Amount allowed depends on filing status
Individual Income Taxes C3-15
Standard Deduction
(slide 1 of 2)
The basic standard deduction (BSD) amount depends on filing status of taxpayer
Filing status Single MFJ, SS HH MFS
TABLE 31
2007 $5,350 10,700 7,850 5,350
2008 . $5,450 10,900 8,000 5,450
Individual Income Taxes
C3-16
Standard Deduction
(slide 2 of 2)
Additional standard deduction (ASD)
For taxpayers age 65 or older and/or legally blind Filing Status Single MFJ, SS HH MFS
Individual Income Taxes
TABLE 32
2007 $1,300 1,050 1,300 1,050
2008 . $1,350 1,050 1,350 1,050
C3-17
Determining Standard Deduction
Examples (2008 tax year):
Taxpayer is single, blind, and age 65 or older
SD = $5,450 (BSD) + $1,350 (ASD) + $1,350 (ASD) = $8,150
Taxpayers are married, filing jointly, one blind, and both age 65 or older
SD = $10,900 (BSD) + $1,050 (ASD) + $1,050 (ASD) + $1,050 (ASD) = $14,050
Individual Income Taxes
C3-18
Personal and Dependency Exemption Amounts
Amounts
2007: $3,400 per exemption 2008: $3,500 per exemption One per taxpayer (two personal exemptions when married, filing jointly) and for each dependent
Exception: Individual claimed as dependent by another taxpayer does not receive a personal exemption
Individual Income Taxes C3-19
Personal and dependency exemptions
Taxpayers Ineligible For Standard Deduction
Certain taxpayers cannot use the SD:
Married, filing separately, when either spouse itemizes deductions Nonresident aliens Individual filing return for tax year of less than 12 months because of change in annual accounting period
Individual Income Taxes
C3-20
SD Limit For Person Claimed as Dependent
Individual claimed as dependent has a BSD limited to the greater of:
$900 or $300 plus earned income (but not exceeding normal BSD)
ASD amount(s) still available
Individual Income Taxes C3-21
Examples of SD Limit (slide 1 of 2)
Dependents SD (2008 tax year):
A blind child who earns $200 and is claimed by parents as a dependency exemption
SD = $900 (BSD) + $1,350 (ASD) = $2,250
A child who earns $1,500 and is claimed by parents as a dependency exemption
SD = $1,800 [BSD equal to greater of $900 or ($300 + $1,500 earned income)]
Individual Income Taxes
C3-22
Examples of SD Limit (slide 2 of 2)
Examples of dependents SD (2008 tax year)
A child who earns $5,500 and is claimed by parents as a dependency exemption
SD = $5,450 [BSD limited to normal amount]
Individual Income Taxes
C3-23
Personal and Dependency Exemptions In Year Of Death Personal exemption allowed on joint return for spouse who dies during the year
Example: Tom and Betty were married in 1990. Tom dies on February 1, 2008. A personal exemption may be claimed for Tom on the taxpayers 2008 joint return.
Individual Income Taxes
C3-24
Dependency Exemptions (slide 1 of 2)
A dependency exemption is available for one who is either a qualifying child or a qualifying relative
A qualifying child must meet the following tests:
Relationship Abode Age, and Support
C3-25
Individual Income Taxes
Dependency Exemptions (slide 2 of 2)
One objective of the Working Families Tax Relief Act of 2004 (WFTRA of 2004)
Establish a uniform definition of qualifying child for purposes of the:
Dependency exemption Head-of-household filing status Earned income tax credit Child tax credit Credit for child and dependent care expenses
C3-26
Individual Income Taxes
Relationship Test
The child must be the taxpayers:
Son or daughter Stepson or stepdaughter Brother or sister Stepbrother or stepsister Half brother or half sister, or A descendant of such individual (e.g., grandchildren, nephews, nieces)
A child who has been adopted, or whose adoption is pending, qualifies A foster child may also qualify
Individual Income Taxes C3-27
Abode Test
A qualifying child must live with the taxpayer for more than half of the year
Temporary absences from the household due to special circumstances (e.g., illness, education) are not considered
Individual Income Taxes
C3-28
Age Test
The child must be under age 19 or under age 24 in the case of a student
A student is a child who, during any part of five months of the year, is enrolled full time at a school or government-sponsored on-farm training course Individuals who are disabled are not subject to the age test
Individual Income Taxes C3-29
Support
To be a qualifying child, the individual must not be self-supporting
Cannot provide more than one-half of his or her own support In the case of a full-time student, scholarships are not considered to be support
Individual Income Taxes
C3-30
Tiebreaker Rules
In situations where a child may be a qualifying child for more than one person
Tiebreaker rules specify which person has priority in claiming the dependency exemption
Individual Income Taxes
C3-31
Qualifying Relative
In order to claim a dependency exemption for a qualifying relative, the following tests must be met:
Relationship Gross income Support
Individual Income Taxes
C3-32
Relationship Test (slide 1 of 3)
The relationship test for a qualifying relative is more expansive than for a qualifying child. Also included are the following relatives: Lineal ascendants (e.g., parents, grandparents) Collateral ascendants (e.g., uncles, aunts) Certain in-laws (e.g., son-, daughter-, father-, mother-, brother-, and sister-in-law). For purposes of applying the relationship test, the terms brother and sister include a brother or sister by the half-blood. Once a relationship of affinity is established, it does not terminate by divorce or death.
Relationships described, but not defined, in the statute, such as sister-inlaw, are interpreted by applying rules of affinity. For example, although a man is related to his wife's brother, he is not related to the brother's wife. Individual Income Taxes C3-33
Relationship Test (slide 2 of 3)
The relationship test also includes unrelated parties who live with the taxpayer.
An individual who does not satisfy the relationship test can qualify as the taxpayer's dependent if: A. the individual is not the spouse of the taxpayer at any time during the tax year;
A. the individual's principal place of abode is the home of the taxpayer; and B. the individual is a member of the taxpayer's household.
Individual Income Taxes
C3-34
Relationship Test (slide 3 of 3)
The member-of-the-taxpayer's-household test requires that the individual be a member of the taxpayer's household during the entire tax year of the taxpayer .A temporary absence during the tax year because of special circumstances does not violate this rule. Special circumstances include illness, education, business, vacation, military service or a custody agreement under which the individual is absent for less than six months. An elderly person who is indefinitely confined to a nursing home because of an illness that requires constant medical care is treated as only temporarily absent from his or her principal abode. 152(d)(2)(H) An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.
Individual Income Taxes
C3-35
Gross Income Test
Dependents gross income must be less than the exemption amount ($3,500 for 2008)
Individual Income Taxes
C3-36
Support Test
Taxpayer must provide more than 50% of the qualifying relatives support
Only amounts expended are considered in the support test Scholarships are not considered in the support test
Two exceptions to the support test:
Multiple support agreements Children of divorced parents
Individual Income Taxes
C3-37
Problem 33-A
For 2008, Leo & Amanda (48 & 46) furnish more than 50% of the support of their children, Elton (18) & Trista (24). Elton earns $ 4,500 aiding the elderly; Trista receives a $ 5,000 scholarship; Determine the number of personal & dependency exemptions.
Individual Income Taxes C3-38
Problem 33-B
Audra (65) divorced and lives alone. She maintains a household for her Ex Clint, and his mother, Olive (82 & blind) & furnishes more than 50 % of their support. Determine the number of personal & dependency exemptions.
Individual Income Taxes
C3-39
Problem 33-C
Jacque (52) furnishes more than 50% of the support of his daughter, Carin (18) & her husband Pierce (18) who live with him. Pierce earns $ 4,000 part-time. They live in New Yorkcommon law state. Determine the number of personal & dependency exemptions.
Individual Income Taxes C3-40
Multiple Support Agreements
Allows one member of a group providing > 50% of support to claim individual even though no one person provides > 50% support
Eligible parties must provide > 10% of support Each eligible party must meet all other dependency requirements
Example - Allows children of elderly parent to claim exemption for parent when none individually meets the 50% support test
Individual Income C3-41
Multiple Taxes Support Agreements
Illustration: X's support is provided as follows: Source % of total ----------------------------------------------- Social security................... 25 N, an unrelated neighbor.......... 11 B, a brother of X................. 14 D, a daughter of X................ 10 S, a son of X..................... 40 -- Total.......................... 100
Individual Income Taxes C3-42
Multiple Support Agreements
B, D, or S could claim X as a dependent except for the fact that none of them contributes more than half of the total support. However, the three of them together provide more than half (64%) of X's support. But only B or S can claim X as a dependent since D's contribution does not exceed 10%. Hence either B or S can claim X as his dependent provided the other waives his right to claim X as a dependent. No waiver declaration is required from D. Although N contributed more than 10%, N is not a member of the group entitled to claim X as a dependent, because N is unrelated.
Individual Income Taxes
C3-43
Children of Divorced Parents
Special rules apply if the parents meet the following conditions:
They would have been entitled to the dependency exemption had they been married and filed a joint return They have custody (either jointly or singly) of the child for more than half of the year
Under the general rule, the parent having custody of the child for the greater part of the year (i.e., the custodial parent) is entitled to the dependency exemption
General rule does not apply if
A multiple support agreement is in effect Custodial parent issues a waiver in favor of the noncustodial parent
Individual Income Taxes
C3-44
Other Rules for Dependency Exemptions
In addition to fitting into either the qualifying child or the qualifying relative category, a dependent must also meet:
The joint return, and The citizenship or residency tests
Individual Income Taxes
C3-45
Joint Return Test
Dependent cannot file a joint return with spouse unless:
Filing solely for refund of tax withheld No tax liability exists for either spouse Neither spouse required to file return
Individual Income Taxes
C3-46
Citizenship or Residency Test
Dependent must be a U.S. citizen or a resident of U.S., Canada, or Mexico for some part of the calendar year in which the taxpayers tax year begins
An exception provides that an adopted child need not be a citizen or resident of the U.S. (or a contiguous country) as long as his or her principal abode is with a U.S. citizen
Individual Income Taxes C3-47
Phase-out of Exemptions (slide 1 of 4)
Applies when taxpayers AGI in 2008 exceeds:
$239,950 for married, filing jointly, or surviving spouse $199,950 for head of household $159,950 for single $119,975 for married, filing separately
The phase-out of exemptions is being repealed in two stages and will not be complete until 2010
The exemption phaseout remains at two-thirds for 2006 and 2007 and at one-third for 2008 and 2009
Individual Income Taxes
C3-48
Phase-out of Exemptions (slide 2 of 4)
Exemptions deduction is reduced by 2% for every $2,500 ($1,250 for MFS), or part thereof, that AGI exceeds threshold amounts
The amount of the phased-out exemptions is then multiplied by 1/3 (the reduction-ofphaseout fraction) for tax years 2008 and 2009
Individual Income Taxes
C3-49
Phase-out of Exemptions (slide 3 of 4)
Illustration: For 2008, a married couple with two dependents has AGI of $250,200. Their total deduction for exemptions (before applying the phaseout rule) is therefore $14,000i.e., the 2008 basic exemption amount of $3,500, multiplied by 4. Because the couple's AGI of $250,200 exceeds the applicable inflation adjusted threshold amount of $239,950, their total deduction for exemptions of $14,000 must be reduced to $13,533 under the phaseout rule as follows:
Individual Income Taxes C3-50
Phase-out of Exemptions (slide 4 of 4)
Taxpayers' AGI...................................... $250,200 Less applicable threshold amount............ 239,950 Excess AGI................................. $ 10,250 ======== Excess AGI in multiples of $2,500 ($10,250 / $2,500 = 4.1).................. 5 (in 2008): Reduction Percentage: 2% of multiple (5 X 2%) = 10% Reduction amount (10% X $14,000 X 1/3) =$ 467 Reduced exemption allowance ($14,000-$467) = $ 13,533
Individual Income Taxes C3-51
Child Tax Credit
$1,000 tax credit is allowed for each dependent child under the age of 17
Qualifying child includes stepchildren and eligible foster children
Individual Income Taxes
C3-52
Taxes Rates
Tax liability is computed using either the Tax Table method or the Tax Rate Schedule method
Most taxpayers must use the Tax Tables Certain taxpayers may not use the Tax Table method including:
An individual who files a short period return Individuals whose taxable income exceeds the maximum (ceiling) amount in the Tax Table
The 2007 Tax Table applies to taxable income below $100,000
An estate or trust
For 2008 the tax rates are 10%, 15%, 25%, 28%, 33%, and 35%
Individual Income Taxes C3-53
Kiddie Tax (slide 1 of 10)
Net unearned income (NUI) of child is taxed at parents rate
For tax years beginning after December 31, 2005, this special provision, commonly referred to as the "kiddie tax," applies to a child if the child is not yet 18 years old before the close of the tax year and does not file a joint return for the tax year and either parent is alive at the close of the child's tax year. For tax years beginning after May 25, 2007, the "kiddie tax," also applies to 18 year-old children and 19 to 23 year-old students who do not provide more than half of their support with earned income. NUI generally equals unearned income less $1,800 (2008 tax year)
Individual Income Taxes C3-54
Kiddie Tax (slide 2 of 10)
Unearned income includes:
Taxable interest Dividends Capital gains Rents Royalties Pension and annuity income, and Unearned income from trusts
C3-55
Individual Income Taxes
Kiddie Tax (slide 3 of 10)
Computing NUI for Kiddie Tax:
Unearned income Less: $900 Less: The greater of: i) $900, or ii) Allowable itemized deductions connected with production of unearned income Equals: net unearned income
Individual Income Taxes C3-56
Kiddie Tax (slide 4 of 10)
Net unearned income taxed at parents rate
Remainder of taxable income taxed at childs rate
Two options for computing the tax
A separate return may be filed for the child
The tax on net unearned income (referred to as the allocable parental tax) is computed as though the income had been included on the parents return
Form 8615 is used to compute the tax
The parents may elect to report childs income on their own return
Certain requirements must be met
Individual Income Taxes C3-57
Kiddie Tax (slide 5 of 10)
Example. For 2008, Mr. and Mrs. Smith are in the 25% federal income tax bracket. That is, they would pay $25 in additional tax on every $100 of additional income. The couple are the parents of a 16-year-old son, Tommy, to whom they transfer a $20,000 bond that pays 10%. Tommy therefore receives $2,000 of investment income. He has no other income.
Individual Income Taxes C3-58
Kiddie Tax (slide 6 of 10)
Tommys unearned income Exclusion Greater of Basic Standard Deduction or direct expenses Net Unearned Income $ 2,000 (900)
(900) 200
Individual Income Taxes
C3-59
Kiddie Tax (slide 7 of 10)
Tommys Gross Income $ 2000 Standard Deduction Greater of $900 or earned income plus $ 300 ( 900) Taxable Income 1,100 Net Unearned Income ( 200)* Taxed at Tommys 10% Rate 900 x.10 = $ 90 * Taxed at parents 25% Rate. (200 x .25) = 50 Total tax 140
Individual Income Taxes
C3-60
Kiddie Tax (slide 8 of 10)
For purposes of the kiddie tax, the source of the incomeproducing property is irrelevant. For example, the property may have been transferred to the child: A. by gift from the child's parents, grandparents or anyone else; B. in any type of trust; C. by gift under the Uniform Gift to Minors Act; or D. by inheritance. Unearned income may also be derived from money that the child has earned. For instance, if the child deposits earned income in a savings account, the interest paid on that account is unearned income.
Individual Income Taxes C3-61
Kiddie Tax (slide 9 of 10)
A child with sufficient income must file a return (or a parent or guardian must do so on the child's behalf) and pay the tax liability. These restrictions limit a family's ability to lower aggregate tax liability by shifting income from higher-bracket adults to lowerbracket children.
Individual Income Taxes C3-62
Kiddie Tax (slide 10 of 10)
If the kiddie tax does not apply, the child calculates and reports tax liability as any other taxpayer would. Even if the kiddie tax does apply, the child's regular tax liability must also be computed, with the child paying whichever tax is higher. Thus, the tax on a child who is subject to the kiddie tax is the greater of the tax on all of the child's income without regard to the special rules for net unearned income, or the sum of the tax on the child's total income reduced by net unearned income, plus the child's share of the allocable parental tax.
Individual Income Taxes
C3-63
Filing Requirements (slide 1 of 2)
General Rule: Tax return must be filed if gross income is the sum of the standard deduction and exemption amount
ASD for blind does not apply for this determination
Special rules apply for dependents and selfemployed taxpayers
Individual Income Taxes
C3-64
Filing Requirements (slide 2 of 2)
Tax return of an individual is due on or before the 15th day of the 4th month after taxpayers year end
Most individuals are calendar year taxpayers, thus, due date is April 15
May obtain a 6 month extension of time to file
Excuses a taxpayer from penalty for failure to file, not from penalty for failure to pay
If more tax is owed, extension request (Form 4868) should be accompanied by check for balance of tax due
Individual Income Taxes C3-65
Filing Status
There are 5 filing statuses
Single Married, filing jointly Surviving spouse (qualifying widow or widower) Head of household Married, filing separately
Filing status affects tax rate brackets, standard deduction, and other amounts
Individual Income Taxes
C3-66
Single Filing Status
Includes a taxpayer who is unmarried or separated from spouse by a divorce decree or separate maintenance agreement and does not qualify for another filing status
Marital status is determined as of the last day of the tax year
When a spouse dies during the year, marital status is determined as of the date of death
Individual Income Taxes
C3-67
Married Filing Jointly (MFJ) Filing Status
Married as of last day of taxable year, or Spouse dies during taxable year
Individual Income Taxes
C3-68
Surviving Spouse Filing Status
Same tax rate brackets as married, filing jointly File as surviving spouse for 2 years after death of spouse if taxpayer maintains a home in which a dependent child lives
Individual Income Taxes
C3-69
Married Filing Separately Filing Status
Married but not filing a return with spouse and not abandoned spouse
Individual Income Taxes
C3-70
Head of Household (HH) Filing Status
Must be unmarried as of end of year or an abandoned spouse Must pay > half the cost of maintaining a household which is the principal home of a dependent for more than half of tax year
A dependent must satisfy either the qualifying child or the qualifying relative category
A qualifying relative must also meet the relationship test
Individual Income Taxes
C3-71
Exception to the HH Requirements
HH may be claimed if taxpayer maintains a separate home for his or her parents
At least one parent must qualify as a dependent
Individual Income Taxes
C3-72
Abandoned Spouse
Allows married taxpayer to file as Head of Household if taxpayer:
Does not file a joint return Paid > half the cost of maintaining a home Spouse did not live in home during last 6 months of tax year Home was principal residence of taxpayers child for > half of year Can claim child as a dependent
Individual Income Taxes C3-73
Gains and Losses from Property Transactions (slide 1 of 3)
In order for gains (losses) to be recognized (included in gross income), they must be realized:
Realized gain (loss) = amount realized - adjusted basis Amount realized = selling price - costs of disposition Adjusted basis = cost + capital additions - cost recovery
Individual Income Taxes
C3-74
Gains and Losses from Property Transactions (slide 2 of 3)
All realized gains are recognized unless a specific tax provision provides otherwise (e.g., nontaxable exchanges) Realized losses may or may not be recognized depending on the circumstances
Generally, losses on the sale or disposition of personal use property are not recognized
Individual Income Taxes
C3-75
Gains and Losses from Property Transactions (slide 3 of 3)
Once recognized gains or losses have been determined, they must be classified as ordinary or capital
Ordinary gains are fully taxable Ordinary losses are fully deductible
Capital gains and losses are subject to special tax treatment
Individual Income Taxes C3-76
Gains and Losses from Capital Asset Transactions (slide 1 of 2)
Capital assets are defined as any property other than:
Inventory, Accounts Receivable, and Depreciable property or real property used in a business
Most personal use assets owned by individuals are capital assets
Losses on these assets are not deductible
Individual Income Taxes C3-77
Gains and Losses from Capital Asset Transactions (slide 2 of 2)
Gains and losses from capital asset transactions must be netted
Net gains and losses by holding period If excess losses result, they are shifted to the category carrying the highest tax rate
Individual Income Taxes
C3-78
Max Tax Rates for Net Capital Gains of Individuals
Classification Maximum Rate Short-term gains (held one year) 35% Long-term gains (held > one year) Collectibles 28% Certain depreciable property used in a trade or business (unrecaptured 1250 gain) 25% All other long-term capital gains 15%, 5%, or 0%
Individual Income Taxes
C3-79
Treatment of Capital Losses
Net capital losses of individuals are deductible FOR AGI up to $3,000 yearly
Excess capital losses are carried over to the next tax year When carried over, capital losses retain their classification as short- or long-term
Individual Income Taxes
C3-80
Individual Income Taxes
C3-81