savefirst advanced tax training 2011. savefirst intermediate training ● 2011 © training outline...

SaveFirstAdvanced Tax Training

2011

SaveFirst Intermediate Training ● 2011 ©

Training Outline1.1. Taxable Portion of a Pension PlanTaxable Portion of a Pension Plan

2.2. Sale of StockSale of Stock

3.3. Sale of HomeSale of Home

4.4. Schedule K-1Schedule K-1


Training Outline

1.1. Taxable Portion of Taxable Portion of Retirement DistributionsRetirement Distributions





Fully Taxable Plans• A plan is fully taxable if

the employer contributed all of the initial money into the retirement plan

a taxpayer contributed to the plan only with pre-tax dollars (withheld from paycheck)

The funds are taxed now because neither the The funds are taxed now because neither the contributions nor the gains have contributions nor the gains have

already been taxed.already been taxed.

Taxable Portion of Retirement Distributions


Partially Taxable Plans• A plan is partially taxable if

The taxpayer contributed to the plan with after-tax dollars


SOME of the funds (those SOME of the funds (those contributed by the contributed by the employer and the employer and the

employee with pre-tax employee with pre-tax dollars) are taxed now dollars) are taxed now

because neither the because neither the contributions nor the gains contributions nor the gains have already been taxed. have already been taxed.

SOME of the funds are exempt SOME of the funds are exempt from tax because the from tax because the

taxpayer has already paid a taxpayer has already paid a tax on that money.tax on that money.


IRAs• Earnings and investment gains generally

accumulate tax-free or tax-deferred until they are withdrawn as fully or partially taxable distributions.

• There are four kinds of IRAs, each with different tax implications: Traditional IRA Roth IRA Savings Incentive Match Plans for Employees

(SIMPLE) IRA (OUT OF SCOPE) Simplified Employee Pension (SEP) IRA (OUT OF

SCOPE


Determining the Taxable Portion

• Typically, the taxable amount is reported Box 3 of the 1099R

• If not, use the Simplified Method to calculate the tax-free portion of each pension payment. Divide the taxpayer’s cost (total post-tax

contributions) by the total number of anticipated monthly payments (based on taxpayer age)



Simplified Method• You must have the following information:

Cost in plan at starting date (Box 9b) Age of retiree (and spouse if a joint annuity) at

starting date The amount in past years that has already

been excluded



Disability Pension Issues• Code 3 in Box 7

• BEFORE taxpayer reaches mandatory retirement age: treated as wages Link to 1099R from Line 7 to report

• AFTER taxpayer reaches mandatory retirement age: treated as retirement income




2.2. Sale of StockSale of Stock3.3. Sale of HomeSale of Home



Investment Income• Investment property produces investment

income Interest Dividends Capital gains

Sale of Stock


Capital Gains• Sale of stock

• Sale, exchange, or redemption of mutual fund shares

Redemption:

Fund reacquires shares in

exchange for money or property

Sale:

Transfer of shares for

money

Exchange:

Transfer of shares for other

shares

Sale of Stock


1099-B

Sale of Stock


Form 1099-B• Form 1099-B, Proceeds From Broker and Barter

Exchange Transactions, includes 5 new boxes: Box 1b to report the date of acquisition Box 3 to report cost or other basis Box 5 to report the amount of loss disallowed due to a wash sale Box 6 to report whether the property sold is a noncovered

security Box 8 to report whether the gain or loss is short-term or long-

term.

• Brokers must complete boxes 1b, 3, 5, and 8 when reporting sales of securities, unless box 6 is checked.


Sale of StockGAIN = AMOUNT REALIZED – ADJUSTED BASIS

In Layman’s Terms…

GAIN = MONEY YOU GET – MONEY YOU PAID

Adjusted basis: Original cost of the shares of stock Adjusted basis: Original cost of the shares of stock increased or decreased to account for commissions, increased or decreased to account for commissions,

fees, depreciation, etc.fees, depreciation, etc.

Sale of Stock


Determining Adjusted Basis• INCREASE adjusted basis per share for

Commissions Fees

• DECREASE adjusted basis per share for Stock Dividends Stock splits

• Inherited property = FMV of property on date of decedent’s death

Sale of Stock


Determining Gain or Loss• GAIN: amount realized is GREATER than

adjusted basis

• LOSS: amount realized is LOWER than adjusted basis

Sale of Stock


Gross vs Net Proceeds• Gross proceeds

Commissions/fees not already included Preparer must add them to the basis

• Net proceeds Adjustment has already been made

Remember: Basis must be adjusted for commissions/fees for purchase OR sale

Sale of Stock


Holding Period• Period starts the day after the property is

acquired and continues through the day it is sold

Sale of Stock

Short-term:Short-term:held for one year or held for one year or

lessless

Long-term:Long-term:Held for more than Held for more than

one yearone year

Note: Inherited property is ALWAYS long-term


Determining Shares Sold• Specific Share Identification

Taxpayer CAN identify which shares were sold (received written confirmation from broker)

Basis = Adjusted basis of specific shares

• FIFO (First In, First Out) Taxpayer CANNOT identify which shares

were sold Basis = Adjusted basis of oldest shares

Sale of Stock


Form 8949• A new Form 8949 contains all capital gain and loss

transactions. Subtotals from Form 8949 are carried over to Schedule D, where

gain or loss is calculated in aggregate.

• Short and long-term transactions are listed by these categories: Form 1099-B, Box 3 that show basis Form 1099-B, Box 3 that does not show basis Form 1099-B not received

• A checkbox in Part I and Part II identifies the type of transaction reported.

Note: Information will be reported first on a Capital Gain Worksheet.


Form 8949


Reporting Income from Sale of StockInformation from 1099-B is reported on Sch D

• From the Sales Price column in Schedule D Part I or II, link to the Form 8949

• At the top of 8949, select type of transaction.• From the Description of Property column, link to

Capital Gain or Loss Transaction Worksheet. Make sure to indicate type of transaction on Capital Gain

or Loss Worksheet as well.

• Do not enter this information directly on Form 8949 or Schedule D.


Worthless Securities• Worthless

no reasonable hope that investors will get anything for their holdings

Even if only worth pennies, shares are not worthless

Stocks or Bonds

• Treated as if sold on the last day of the tax year

Sale of Stock


Carryover Losses• Loss that can be claimed in one year is the

lesser of The total loss OR $3000 ($1500 if MFS)

• Unused portion of loss can be carried over from year to year until total loss is claimed remains long-term or short-term. if not claimed in some year, unused loss is decreased

by the amount that should have been claimed.

• Reported on Sch D

Sale of Stock


Mutual funds• Use cost basis OR average basis

If elected, average basis must be used for all If elected, average basis must be used for all accounts in the same fund in all succeeding years accounts in the same fund in all succeeding years (this must be determined by broker).(this must be determined by broker).

• Capital gains are reported on 1099-DIVCapital gains are reported on 1099-DIV Enter on interest statement; Taxwise will transfer Enter on interest statement; Taxwise will transfer

amount to Sch Damount to Sch D

For more info, see Publication 550

Sale of Stock


Out of Scope• Stock received as a gift

• Inherited stock with basis calculated other than using date of decedent’s death

• Bonds or other tax-exempt holdings with basis not determined

Sale of Stock

For TY 2010, Congress repealed the estate tax.

If the decedent died between December 31, 2009 and January 1, 2011 the basis of the inherited property is neither the adjusted basis to the buyer nor the FMV at the

time of death.

Refer any taxpayers with stock inherited from a 2010 decedent to a paid preparer.


PracticeJohn bought 100 shares of ABC stock at $10 each in 2004. Then, he bought 50

additional shares at $12 each in 2005. He had to pay a commission of $50 to acquire the 2005 stocks. What is his basis in the

ABC stock?

Sale of Stock


PracticeJohn bought 100 shares of ABC stock at $10 each in 2004. Then, he bought 50

additional shares at $12 each in 2005. He had to pay a commission of $50 to acquire the 2005 stocks. What is his basis in the

ABC stock?

(100 shares * $10) + (50 shares * $12) + $50 commission = $1,650

Sale of Stock


PracticeOn March 15, Bill bought 1,000 shares of stock for $15,000, including commission. On March 15, one year later, he sold 600

shares of the stock for $7,800, net proceeds (shown on Form 1099-B). Is this short-term or long-term? Is this a loss or a

gain?

Sale of Stock


PracticeOn March 15, Bill bought 1,000 shares of stock for $15,000, including commission. On March 15, one year later, he sold 600

shares of the stock for $7,800, net proceeds (shown on Form 1099-B). Is this short-term or long-term? Is this a loss or a

gain?

Short-term. $7,800 - [($15,000 ÷ 1,000) x 600] = -$1,200

Sale of Stock


Practice1991 100 shares $10/each

1992 200 shares $11/each

1993 100 shares $9/each

In 2010, Alice sold 150 shares, but cannot identify which shares she sold. Which

shares do we assume that she sold, and what is the basis?

Sale of Stock


Practice1991 100 shares $10/each1992 200 shares $11/each1993 100 shares $9/each

In 2010, she sold 150 shares, but cannot identify which shares she sold. Which shares do we assume that she sold, and what is the basis?

100 shares from 1991 and 50 shares from 1992.BASIS = (100*$10) + (50*$11) = $1,550

Sale of Stock


PracticeRuth bought 200 shares of XYZ stock for $600. She paid a $50 fee to acquire the

shares. She sold all of the shares for $900. She paid a 5% ($45) commission to

sell the shares. Her 1099-B lists gross proceeds of $900. What is the adjusted

basis? What is the gain or loss?

Sale of Stock


PracticeRuth bought 200 shares of XYZ stock for $600. She paid a $50 fee to acquire the

shares. She sold all of the shares for $900. She paid a 5% ($45) commission to sell the shares. Her 1099-B lists gross proceeds of $900. What is the adjusted basis? What is

the gain or loss?

Basis = $600 + $50 + $45 = $695Gain = $900 – $695 = $205

Sale of Stock




3.3. Sale of HomeSale of Home4.4. Schedule K-1Schedule K-1


Sale of Home• Taxpayers can exclude $250,000

($500,000 if MFJ) of the gain from taxable income. Meet Ownership AND Use Tests. Not excluded gain in two years prior to current

sale of home

Sale of Home


Ownership and Use Tests• In the 5 years preceding date of sale,

taxpayer must Own the home for at least 2 years (either

spouse if MFJ) Live in the home as his/her main home for at

least 2 years (both spouses if MFJ)

• Can be different 2-year periods

Sale of Home

Important: Important: If either spouse does not meet requirements, it isIf either spouse does not meet requirements, it is

OUTSIDE THE SCOPE OF VITAOUTSIDE THE SCOPE OF VITA


Determining Main Home• Taxpayers CANNOT choose

Must live in the home most of the time; In same location as place of employment,

organizations, church, banks Other family members live there Address for bills and homestead exemption Address listed on tax returns, driver’s license,

car registration, voter registration.

Sale of Home


Reporting the GainGAIN = AMOUNT REALIZED – ADJUSTED BASISGAIN = AMOUNT REALIZED – ADJUSTED BASIS

• Selling price: Total amount received from sale• Amount realized: Selling price - selling expenses• Basis:

The price of purchase OR FMV on date of decedent’s death (inherited property)

• Adjusted basis: Additions/improvements useful life > 1 year

Sale of Home


Reporting the Gain• Not reported unless greater than exclusion

amount UNLESS taxpayer receives 1099-S (reported,

but not taxed)

• Part II of Schedule D (Long Term Gains)

• CANNOT deduct losses If taxpayer receives a 1099-S, he/she must

report a loss of “0” on Sch D

Sale of Home


Schedule K-1• Reports income from

Partnership S-corporation Estate Trust

Schedule K-1


Schedule K-1

Schedule K-1


Types of Income

Schedule K-1

Type if Income Where to Report

Taxable Interest Schedule B

Tax Exempt Interest 1040, Line 8b

Dividends Schedule B

Capital Gains/Losses Schedule D

Royalties Schedule E


Out of Scope• Any income NOT on listed the previous

slide

• Royalty income on a 1099-MISC

Schedule K-1


Taxwise Exercisestwonline.taxwise.com/training

• Exercises: Austin Fleming Sterling

savefirst advanced tax training 2011. savefirst intermediate training ● 2011 © training outline...

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