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10 Cards in this Set
- Front
- Back
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Interest Income
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Municipal interest income is tax-free at federal level for regular tax
If the bond is a private activity bond, the interest is an AMT preference U.S. debt (bills, notes, bonds) interest is taxable at federal level (often exempt at state level) |
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Gains/Losses on Securities
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realization requires a sale or exchange
gain/loss = [Proceeds - selling expenses] adjusted basis character is capital - time period matters for favorable tax treatment |
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Basis in Stock
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if an investor elects to reinvest dividends in additional shares of stock or a mutual fund, the dividend becomes the cost basis in the new shares
if an investor receives a nontaxable distribution with respect to shares of stock, the basis in the shares must be reduced by this return of capital = |
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Losses on Worthless Securities and Bad Debts
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Capital losses. If an individual owns a security that security becomes worthless, the event is treated as if the individual sold the security on the last day of the year for an amount realized to zero.
The individual recognizes his unrecovered bases in the security as a capital loss second event occurs when an individual who loaned money to another party determines that the debt is uncolletible. In such case, the individual recognizes the unpaid balance of the nonbusiness bad debt as a capital loss. |
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Exchanging Securities
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General rule is that exchanges are taxable
nontaxable if - the stocks are similar stocks in the same corporation, or - part of a nontaxable reorganization, such as a merger the investor's basis in his newly acquired security equals the basis of the security surrendered. Because of this substituted basis rule, gain or loss realized on the exchange is merely deferred, not eliminated |
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Taxation of Capital Gains and Losses
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- SHORT TEM asset held for <= 1 year
- LONG TERM asset held for > 1 year - Net the gains and losses in each class - Net the ST gain/loss with the net LT gain/loss - IF the total net capital gain/loss is a LOSS Deduct $3,000 against ordinary income Carryforward remainder indefinitely |
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Netting and Tax Rates - Net Gain
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IF the total net capital gain/loss is a GAINS
- Any NET ST gain is taxed at regular rates - A very few specific Net LT gains that are taxed at lower of 28% or regular rate - Section 1231 gain treated as capital which is attributed to unrecaptured realty depreciation (remember-we only recapture 20% on realty) is taxed at the lesser of 25% if regular rate - Any other NET LT is taxed at 15% (0% if the individual is in 10/15% ordinary bracket) |
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Deferral with Life Insurance
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-life insurance proceeds are not taxable at death
-life insurance policies (but not term life policies) build up cash surrender value (CSV) for every year that the policy remains in effect - CSV increase is not taxed (inside buildup) - unless the policy is liquidated - if liquidated, excess of CSV over premiums paid is taxable |
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Annuity Contracts
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taxpayer pays for future guaranteed fixed stream of income for a future period of time
tax is deferred until the owner begins receiving periodic payments under the contract the portion of each annuity payment representing a distribution of accumulated earnings is taxed as ordinary income, while the portion representing a return of the owner's investment is nontaxable |
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Investment Interest Expense
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if an individual incurs debt to purchase other investment property (besides local bonds and tax-exempt property) the interest on the debt is an itemized deduction but only to the extent of the debtor's net investment income from any source.
-includes interest, dividend, annuities, STCG -PLUS, if elect to be taxed at ordinary rates, may include LTCG in investment income -Carry forward any excess interest expense indefinitely and deduct in future tax years Other investment expenses are deductible to the extent they exceed 2% of AGI (investment fees, publications, seminars) |
