students2009-ch16 Capital Gains

students2009-ch16 Capital Gains - Stakes Gains Losses LTCG...

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Stakes Gains Losses
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LTCG 15% 5% 0%
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LTCL STCL Deduction Limited
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LTCG STCG LTCL STCL
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Why Preferential Treatment?
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Rationale for Favorable Treatment of CG Pro & Con • Alleviates tax on inflation-produced gains • Bunching of gains leads to higher taxes in a progressive rate system • Encourages investment/ stimulates sales • World trade demands it • Political: principal way of gaining wealth (before 1987) No real economic difference between ordinary and capital gains Preferential treatment produces administrative complexity Political: wealth redistribution and horizontal equity problems; inequities In combination with other tax provisions, preferential treatment for CG can lead to decisions being made for tax rather than for economic reasons Pro-preferential Treatment Con-preferential Treatment
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9 Requirements for LTCG Treatment 1. Sale or exchange 2. Capital asset 3. Holding period
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10 Requirements for LTCG Treatment • Sale or exchange • Exceptions – Abandonment (not sale or exchange) • Produces ordinary loss, if deductible – Worthless stock • Treated as a sale on last day of tax year became worthless – Cancellation of lease – Casualties or thefts of personal use assets, if gain is involved
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11 Holding Period Rules §§ 1223 & 1(h)(8) Short Term: Held 12 months or less Long Term : Held over 12 months
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12 Taxation of Capital Gains for Individuals Type Tax Rate • Short-Term – Ordinary Rates 10% - 35% • Long-Term – General rule • T/P in 15% bracket 0% • T/P in higher bracket 15% – Collectibles & § 1202 stock 28% – Unrecaptured § 1250 gain 25% • Problem 16-24
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13 Taxation of LTCGs: Single Return 10% 15% 20% 25% 28% 33% 35% $0 - $33,950 If ordinary income > $33,950, tax = Tax on ordinary income + Tax on NLTCG x 15% If ordinary income $0 - $ 33,950, tax = Tax on ordinary income at 10% & 15% + Tax on NLTCG x 0% >$82,250
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14 Taxation of LTCGs: Joint Return 10% 15% 20% 25% 28% 33% 35% $0 - $67,900 If ordinary income > $67,900, tax = Tax on ordinary income + Tax on NLTCG x 15% If ordinary income $0 - $ 67,900, tax = Tax on ordinary income at 10% and 15% + Tax on NLTCG x 0%
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15 25% Gains on Real Estate Sell realty (capital asset or § 1231 property) Amount realized $150,000 Adjusted basis Cost $100,000 Depreciation (straight-line) (60,000) Adjusted basis (40,000 ) Gain realized $110,000 Character Depreciation 60,000 25% Balance 50,000 15%
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Definition of Capital Asset
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Definition of Capital Asset
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Definition of Capital Asset
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Road Grader Crane Building Plane Farm land MRI Copier
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Golf balls Cars Razor blades Light bulbs
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Sec. 1221. Capital asset defined For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include-- (1) Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
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Sec. 1221. Capital asset defined (cont.) …but does not include-- (4) Accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);
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Sec. 1221. Capital asset defined
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This note was uploaded on 03/21/2010 for the course ACCOUNTING 533 taught by Professor Eric during the Spring '09 term at Universidade do Minho.

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students2009-ch16 Capital Gains - Stakes Gains Losses LTCG...

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