|
|
Thursday, March 5, 1998
Tax Q&A That Pesky Schedule D As you know, the recent tax law changes had a major impact on the sale of capital assets (including stock). Those changes have caused havoc with the 1997 Schedule D, Capital Gains and Losses. Let's try to understand Schedule D in a little more detail. The best way to read this analysis is with a copy of Schedule D on the desk, right beside your keyboard. I'll be making many references to the form, so if you don't have it in front of you, this will all be confusing. If you don't have a copy of Schedule D available to you, you can print one from the IRS website (click here for IRS forms). Schedule D - Part I Short-term gains and losses (assets held for one year or less) have not changed. Therefore, Part I of Schedule D will look the same as it has in past years. We'll move on. Schedule D - Part II Part II has a new look. Column (g) is brand new. And column (g) wants you to enter the 28% gain or loss relative to the specific transaction. While it may look, at first glance, that you are reporting the same gain or loss twice, you really aren't. What column (g) is really looking for is the gain or loss from:
In all of these cases, the maximum tax that you will pay on these gains will be 28%. The form needs to identify those specific transactions so that they can be properly reconciled in Part IV. Schedule D - Part III Part III allows for the reporting of the gain or loss according to the Schedule D rules. Again, this is very similar to what you saw last year. The meat of the form can be found in the entirely new area: Section IV. You will complete Section IV if BOTH lines 16 (net long-term gains) and 17 (net total gains) are gains; AND if Form 1040, line 38 (taxable income) is greater than zero. Schedule D - Part IV Part IV actually allows you to compute your tax, based upon the types of capital gains that you enjoyed in 1997. Remember that for 1997 there are three capital gains rate groups (28%, 25%, and 20%) depending on the holding period and when the asset was sold. In order to compute your maximum capital gains tax on the specific assets, the form will require additional information from your Schedule D and from your Form 1040. Lines 20 through 26 are trying to specifically identify the gains from the sale of assets that would qualify for the maximum 20% tax rate. These gains would include:
Don't let the computations fool you. If you look at your Schedule D, you should know the correct answer based on your sale dates and holding periods. So simply walk through the computations carefully. Don't be too concerned about line 21 (unless you have investment interest on which you are electing capital gain treatment for certain investment income), nor line 25 (unless you have a sale of real property with depreciation recapture). Lines 28 through 36 simply attempt to test your adjusted gross income level. Remember that if your normal tax would be at the 15% rate, you will actually be allowed a 10% tax rate (as opposed to a 20% tax rate) on your qualified capital gains. This section of the form attempts to "test" your tax bracket. If your taxable income is greater than $41,200 (married-joint), $24,650 (single), $20,600 (married filing separate), or $33,050 (head of household), you will NOT be able to benefit from the lower 10% capital gains rate, and you'll be stuck with the 20% rate. So these lines are trying to find out what your "normal" tax rate is, and then lead you in the right direction. If none of your gain qualifies for the 10% rate (line 37), it means that your taxable income level is too great to allow you the use of the 10% rate. But don't fear. The form uses lines 38 through 41 to compute your 20% tax rate on the appropriate gains. Lines 42 through 47 attempt to find any gains subject to the 25% maximum rate. Again, if you had no sales of depreciable real property, these lines will be meaningless to you. If your only gains were from the sale of stock or other capital assets, you will arrive at a result of zero on lines 46 and 47. Lines 48 through 51 attempt to find any gains subject to the 28% maximum rate. In effect, this is really any gain still remaining that was not accounted for in the 10%, 20%, or 25% rate computations. Nothing more. Finally, line 52 requires you to add up all of your taxes on the various component gains, including your tax on your other taxable income. Line 53 computes the tax on your total taxable income from all sources, including capital gains. You compare those two tax computations, and enter the smaller of the two on line 54. And line 54 is the amount that you'll report on your tax return. If you understand the law with respect to capital gains, you will be able to know the appropriate answer before you even do any of the computations in Part IV. You'll find that Part IV is nothing more than a double check of your work. You can find more information on the new capital gains tax changes in the Taxes FAQ area. And if you have any questions on any of the Schedule D issues that we have discussed above, please post your question on the Tax Strategies message board and I'll do my best to provide you with an answer. Please note that Roy cannot answer individual questions in e-mail. If you have tax questions, please ask them on the taxes message board. Thanks!
|
||||||
|
|||||||