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The best way to read this analysis is with a copy of Schedule D and the Schedule D instructions on the desk right beside your keyboard. If you don't have a copy of Schedule D available to you, you can print one from the IRS website at: http://www.irs.ustreas.gov.
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, so we'll move on.
Part II -- This has a new look. Column (g), which is brand new, asks you to enter the 28% gain/loss relative to the specific transaction. While it may look, at first glance, like 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 certain collectibles held for more than one year. Remember that while the new 10% or 20% capital gains rates apply to many capital assets, the sales of collectibles do NOT qualify for the 10% or 20% preferred capital gains tax rate. Collectibles would include works of art, rugs, antiques, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, and alcoholic beverages. In this case, the maximum capital gains tax that you will pay on these collectible gains is 28%. The form needs to identify those specific transactions so that they can be properly reconciled in Part IV.
Part III -- This part simply allows you to report a 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 line 16 (net long-term gains) and line 17 (net total gains) are gains; and if Form 1040, line 39 (taxable income), is greater than zero.
If all of your gain on line 17 is from short-term capital gains, you can simply "blow off" Part IV of the form and report your short-term capital gains on line 13 of your tax return. Why? Because all of this short-term gain will be subject to tax at your "normal" or "marginal" tax rate. Strike another blow in favor of the Foolish buy-and-hold philosophy -- the reduced tax rates for gains on stock held for more than one year.
Part IV -- This part actually allows you to compute your tax, based on the types of long-term capital gains you enjoyed in 1998. Remember that for 1998, there are four capital gains rate groups:
-- 10% and 20% for most long-term capital gains
-- 25% for the maximum tax on the recapture of depreciation on real estate gains
-- 28% for the maximum gain on collectibles held for more than one year.
To compute your maximum capital gains tax on the assets sold and apply the appropriate capital gains rate, Part IV requires you to provide additional information from your Schedule D and from your Form 1040.
Lines 20 through 26 are simply trying to categorize the types of gains you enjoyed in 1998. Report the information requested and perform the computations. You shouldn't have any problems with this section. Don't let the computations fool you. If you look at your Schedule D, you should know the correct answer based on your holding periods. So simply walk through the computations unafraid. And don't be too concerned about line 21 (unless you have investment interest on which you are electing capital gains treatment for certain investment income), or line 25 (unless you have a sale of real property with depreciation recapture).
Lines 28 through 36 attempt to test your taxable income. Remember, if your normal tax would be at the 15% rate, you will actually be allowed a 10% long-term capital gain tax rate. But, if your normal tax would be at the 28% (or higher) rate, you will receive a 20% maximum long-term capital gains tax rate. This section of the form simply attempts to "test" your tax bracket. If your taxable income is greater than $42,350 (married/filing jointly), $25,350 (single), $21,175 (married/filing separate), or $33,950 (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 simply trying to find out what your "normal" tax rate is, and lead you in the right direction.
If none of your gain qualifies for the 10% rate (line 37), it simply means that your taxable income level is too great to allow you the use of the 10% long-term capital gain rate. But don't fear. The form uses lines 38 through 41 to compute your 20% tax rate on the appropriate long-term 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. But, if you did have a sale of depreciable real property, your life is a bit more complicated� at least, it is more complicated than we have time for here. Go through the instructions for Schedule D and Form 4797 to understand what will be reported in lines 42 through 47.
Lines 48 through 51 find any gains subject to the 28% maximum rate (for collectibles). In effect, this is really any gain yet remaining that was not accounted for in the 10%, 20%, or 25% rate computations. Nothing more.
At this time, you might want to take a step back and check your work. Seem right? You generally know if you are in the 15% bracket. If so, did your capital gain push you up over the 15% normal bracket? If it did, most or all of your gain will be taxed at 20%. Are you in the 28% bracket or greater? If that is the case and all of your gains were long-term on the sale of stock (i.e., no real estate or collectibles), you should be able to take the total of your long-term gains, multiply those gains by 20%, and that answer should be the same as what you have reported on line 52.
Finally, line 52 requires you to add up all of your taxes on the various component gains, including taxes 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. Line 54 is the amount 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 discussed above, please post your question in the Tax Strategy message folder and I'll do my best to provide you with an answer.
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