Ten Important Facts About Capital Gains and Losses

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss.

Here are ten facts from the IRS about gains and losses and how they can affect your Federal income tax return.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.
3. You must report all capital gains.
4. You may deduct capital losses only on investment property, not on property held for personal use.
5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.
8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
10. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax. All forms and publications are available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 17, Your Federal Income Tax (PDF 2015.9K)
• Publication 550, Investment Income and Expenses (PDF 516K)

Itemizing Deductions

On Monday, February 14th, the IRS began accepting all tax returns for electronic processing. Itemizers, school teachers and some college students had to wait while the IRS re-programmed their computers and re-designed their forms to add back deductions that were resurrected as part of the Tax Relief Act. Judging from the your reactions, many of you were quite upset. Well now that wait is over.

When Does Itemizing Make Sense? In the cases I've seen, itemizing generally makes the most sense when a person already has deductible expenses on things like state tax withholding, mortgage interest, and property taxes. But there are other situations when itemizing makes sense too: if you've suffered uninsured damage to your house or car, or incurred significant medical bills, itemizing might provide you with some tax benefit for your out-of-pocket expenses. See More About:  schedule a  itemized tax deductions

Alternative Minimum Tax "Minimizes" Some Itemized Deductions The AMT adds back certain itemized deductions to income when calculating the alternative minimum tax. In many instances, the AMT provides an exact offset whereby the tax savings of taking a deduction is perfectly matching with an increase in AMT. In practical terms, the green refund meter on your tax software won't change no matter how high you increase your deductions. The most common deductions that are added back for AMT are state income taxes, property taxes, and all those miscellaneous deductions. See More About:  form 1040  alternative minimum tax

Deductions You Don't Need to Itemize Personally I much prefer to take deductions listed on page 1 of the 1040, as these deductions work directly to reduce income tax and aren't bundled up with other deductions. Teachers can avail themselves of the deduction for classroom expenses, people who are relocated can take the moving expense deduction, and former college students can deduct their student loan interest See More About:  tax deductions  adjustments to income

Eight Essential Facts about Claiming the First-Time Homebuyer Credit

If you purchased a home in 2010, you may be eligible to claim the First-Time Homebuyer Credit, whether you are a first-time homebuyer or a long-time resident purchasing a new home. The purchaser must have been at least 18 years old on the date of purchase; for a married couple, only one spouse must meet this age requirement. A dependent is not eligible to claim the credit.

Here are eight things the IRS wants you to know about claiming the credit:

1. You must have bought – or entered into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed on the home on or before September 30, 2010.
2. To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.
3. To be considered a long-time resident homebuyer you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased.
4. The maximum credit for a first-time homebuyer is $8,000, half that amount for married individuals filing separately. The maximum credit for a long-time resident homebuyer is $6,500. Married individuals filing separately are limited to $3,250.
5. You must file a paper return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit with additional documents to verify the purchase. Therefore, if you claim the credit you will not be able to file electronically.
6. New homebuyers must attach a copy of a properly executed settlement statement used to complete such purchase. Buyers of a newly constructed home, where a settlement statement is not available, must attach a copy of the dated certificate of occupancy. Mobile home purchasers who are unable to get a settlement statement must attach a copy of the retail sales contract.
7. If you are a long-time resident claiming the credit, the IRS recommends that you also attach any documentation covering the five-consecutive-year period, including Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.
8. Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit.

For more information about these rules including details about documentation and other eligibility requirements for the First-Time Homebuyer Tax Credit, visit http://www.irs.gov/recovery.

Avoid a Burnout (Advice for Small Business Owners)

If you are like most small business owners, you very likely work more than five days a week and you fulfill more than just one role in your business. If you own a small coffee shop, you probably also service customers, mentor your employees, order supplies and often do your own bookkeeping, and the list goes on and on.

Often, overloading ourselves with so many functions can lead to stress, exhaustion and eventually burnout.   If that happens, your business will suffer.

Performing all these different functions may have been a financial necessity when you first started this business, but as time goes on and your revenues improve, we should look at ways to ease this burden and enjoy the fruits of our labour.

We should work smart, not hard. Ask yourself, what am I good at? What tasks can I outsource? Can I afford to work on certain things myself? Or is my time better spent earning revenue?

If right now, you do your own bookkeeping or accounting, taking away from earning revenue or from enjoying your family, it’s time to call a professional, who has the expertise and knowledge to help you with your financial goals. You will be amazed at the difference this will make to you and your business!