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How do I figure out capital
gains tax?
Dear Dollar Diva,
I started investing in stocks this year and have a portfolio of
12 companies with a total value of more than $35,000. I know I'll
be selling some of the stocks in the future, but I don't know what
I'm going to be facing in taxes when I do. Can you offer some advice
or recommend a book that will help me deal with the capital gains
when the time comes?
It's smart to understand the rules before you sell
anything. Taxes can take a big bite out of your investment dollars,
and you want to take advantage of whatever breaks you can get. Here
is some general information about capital gains and some other sources
for more in-depth study.
1099-B
When you sell a stock, the amount you receive is called
your "proceeds," and it's reported to the IRS on a 1099-B. You will
get a copy of this form around the same time you get copies of your
W-2 and your 1099s reporting interest and dividends. "Proceeds"
is the amount you will report as the "sales price" when you report
the stock sale on Schedule D of your tax return.
Schedule D
Your capital gains are reported on Schedule
D when you file your Form 1040. There are boxes on the form
to report what you paid for the stock, including transaction costs
and what you sold it for (this should be the same number as the
"proceeds" reported on the 1099-B). The difference between the two
is your capital gains.
There are two types of capital gains:
| Short-Term |
One year or less |
| Long-Term |
More than a year |
As a general rule, if you hold a stock for less than
a year and sell it at a gain, there's no tax advantage. The gain
is taxed as ordinary income like interest and dividends.
The tax break kicks in when you hold a stock for more
than a year. And the richer you are, the more you save:
| 15% |
10% |
5% |
| 28% |
20% |
8% |
| 31% |
20% |
11% |
| 36% |
20% |
16% |
| 39.6% |
20% |
19.6% |
Part IV of the Schedule D is where the tax is computed.
You'll clutch your heart when you first lay your eyes on it, but
if you take it slowly, one line at a time, it's not all that bad.
Later on, the Diva will link you to a couple of resources that should
help. Once you understand the concepts, doing the tax computation
gets easier.
Capital Losses
Capital losses get combined with capital gains on
Schedule D. If the net is a gain, you get to pay tax on all of it,
even if it's a billion dollars.
If the net is a loss, you get to deduct it, but only
up to $3,000, the maximum capital loss deduction allowed each year.
If it's more than $3,000, the balance has to be carried over to
future years where it can be used to offset future capital gains
or provide a $3,000 a year deduction until it's used up.
Books to read
The Internal Revenue Service offers a free, user-friendly,
book titled "Publication
17: Your Federal Income Tax -- For Individuals" to help taxpayers
prepare their tax returns. Its 1999 version has 275 informative
pages, including a good section on capital gains and losses. It
shows how stock sales are reported on Schedule D and how the tax
is computed. Another good resource is IRS "Publication
550: Investment income and expenses, including capital gains and
losses."
If you've read the IRS publications and you're still
clutching your chest, move on to Bankrate.com's "Tax
advice book review" for leads on some good tax books. The Diva
concurs with the author; the best selection for the tax novice is
Taxes
for Dummies.
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DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting,
from the Kellogg Graduate School at Northwestern University in Evanston,
Ill. Rosen has more than 15 years of experience in the financial arena, serving
in Illinois and Florida as a certified public accountant, financial consultant,
expert witness and educator. She is owner of Dorothy Rosen, CPA, a public
accounting firm that serves individuals and small businesses.
