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Investment Taxes
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Reporting your capital gains (or losses)

Schedule D also asks for information on some specific transactions that do not apply to all taxpayers, such as installment sales, like-kind exchanges, commodity straddles, sales of business property and gains or losses reported to you on Schedule K-1.

Check out the complete list and if any of these apply to your tax situation, you probably would be wise to turn Schedule D and the rest of your tax paperwork over to a professional.

Schedule D also requires information on any capital loss carry-over you have from earlier tax years on line 14, as well as the amount of capital gains distributions you earned on your investments. If distributions, line 13, are your only investment items to report, you don't have to fill out Schedule D; they go directly on your 1040 or 1040A return.

You also can escape Schedule D if your only capital gain is from the sale of your residence. As long as you meet some basic residency requirements and your home-sale profit is $250,000 or less ($500,000 for married-filing-jointly home sellers), it's not taxable and you don't have to tell the IRS about it here or on any other form.

Totaling your transactions

Once you've filled in all the short-term and long-term transaction information in Parts 1 and 2, it's time to turn over Schedule D and combine your asset-sale details in Part 3. This section essentially consolidates the work you did earlier, but true to IRS form, it's not as easy as simply transferring numbers from the front of the schedule to the back.

Lines 16 through 22 ask for previous entries and direct you to other lines and forms depending on whether your calculations result in an overall gain or loss. A couple of lines in Part 3 also deal with special rates for collectibles and depreciated real estate. Again, in these situations, expert tax advice might be warranted.

When the total of all your capital activities comes up in negative territory, it's not good investing news, but it is good tax news. Your loss -- up to a limit -- can offset your regular income, producing a smaller amount of income upon which you have to pay taxes.

The IRS will let you use Schedule D to totally eliminate any capital gains, but if you lost more than you gained, you can only claim up to $3,000 of your losses in one tax year against the regular income you report on your Form 1040. Larger losses can be carried forward to use against gains in future tax years and, if there's still an excess, can be written off in $3,000 increments against ordinary income until you completely exhaust the loss.

As a bonus, your loss means you're through with Schedule D. You simply transfer your loss amount to your 1040 and continue your filing work there.

Figuring the tax on your gains

However, when you come up with a gain, the tax paperwork continues. And this is where the math fun begins, especially if you're doing your taxes by hand instead of using software.

Depending on your answers to the various Schedule D questions, you're directed to the separate Qualified Dividends and Capital Gain Tax work sheet or the Schedule D Tax work sheet, which are found in the Form 1040 instructions booklet. Basically, these work sheets take you through calculations of your various types of gain income and figure the appropriate taxation level for each.

Be sure you've completed your Form 1040 through line 43 (that's your taxable income amount) before you begin because that's the starting point of both work sheets. From there you'll have lots of addition, subtraction, multiplication and transferring of numbers from various forms, with many of the entries seeming indecipherable and redundant.

But if you sold stock or other property, don't be tempted to simply ignore Form 8949, Schedule D, the associated tax work sheets and all the extra calculations. Remember, the IRS got a copy of any tax statement your broker sent you, so the agency is expecting you to detail the sale, and gain or loss, with your tax filing.

And your extra work generally is to your tax advantage. Because regular income tax rates can be more than twice that levied on some long-term capital gains, when you're finally through with the calculations, your tax bill should be lower than it would have been if you had simply used the standard tax table to find your tax due.


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