A Capital Idea…Gains and Losses

Now that we’re in the thick of tax season, I want to briefly discuss a topic that affects many taxpayers in this country, capital gains and losses. In my 11/7/11 post, I wrote briefly about the new reporting requirements for both brokers/mutual funds, and taxpayers. In this article, I’d like to discuss in a little more detail exactly what constitutes capital gains or losses.

Did you know that almost everything you own and use for personal purposes, pleasure, or investment is considered a ‘capital asset’ for tax purposes? Well now you know (that, and $2.50 will get you on the NYC subway!) Capital assets include a home, household furnishings, and stocks & bonds, among other things.

When you sell a capital asset, the difference between what you paid for the asset (its basis) and its sales price is capital gain or capital loss. Here’s the fun part…you must report all capital gains. Now here’s the bad part…you may only deduct capital losses on investment property, not on personal-use property. What this means is that you can deduct the loss you had on the sale of your Worldcom stock, but you can’t deduct the loss on the sale of your Ford Pinto.

Capital gains and losses are classified as long-term or short-term, and this is important, since the tax rate on long-term gains is generally 15%, while short-term gains are taxable at your marginal tax rate, which can go as high as 35%. In order to be classified as long-term, the capital asset must have been held more than one year (e.g. a year and a day, or more).

All capital gains and losses are netted out to figure out what needs to be included in your taxable income. If everything nets out to a loss, you can deduct the excess losses on your tax return to reduce your other income (wages, interest, dividends, etc), but there’s an annual limit of $3,000 that can be used. For the unfortunate taxpayers who had huge losses on stocks from the last market crash, the excess of the $3,000 that can be deducted annually can be carried forward and applied in subsequent tax years until used up. If, in subsequent years you have capital gains, the losses that were carried forward can be applied against the capital gains, dollar for dollar.

As I mentioned in my 11/7/11 article, IRS created Form 8949 which must be used starting with 2011 returns, to report capital gains and losses. The totals on the 8949 forms then get carried over to Schedule D, and ultimately on to the 1040.

I hope this helps with your understanding of capital gains and losses, if you were fuzzy about them previously. I welcome any comments you may have on this subject, and please pass along this article to friends, enemies, colleagues, or somebody who could use some extra tax knowledge on what might otherwise be a mundane day!

Dirty Dozen Tax Scams

IRS released their “Dirty Dozen Tax Scams for 2012”, and it isn’t pretty. Individuals participating in these scams face penalties, interest, and possible criminal prosecution, so they’re not to be treated lightly. For the average law abiding taxpayer, the risk isn’t really from participating in one or more of these scams, rather it’s by being a victim of one. Briefly, here are a few of the dirtier scams.

Identity Theft-IRS says that identity theft cases are among “the most complex” ones they handle, but they’re “committed to working with taxpayers who have become victims of identity theft.” What happens is that identity thieves use stolen social security numbers and personal information to file fraudulent tax returns to obtain a tax refund. The trouble begins for a taxpayer when they file their legitimate return after a fraudulent return has been filed with her/his social security number. It’s usually at that point that the theft/fraud is detected, and the work begins to sort it all out. IRS recommends that anybody who believes their personal information has been stolen and used for tax purposes should call their Identity Protection Specialized Unit. More information can be found on IRS’s special identity theft page at http://www.irs.gov/identitytheft.

Phishing-we’ve all probably already seen plenty of emails purporting to be Fedex, Bank of America, U.S. Postal Service, etc, telling us that our mail was undeliverable, our credit card record needs updating, or some other urgent thing that we need to click on a link for. These things are all phishing scams, and the sole aim is to steal our personal information. IRS is warning taxpayers that they NEVER, I repeat, NEVER contact taxpayers by email, so if you ever receive an email saying that it’s IRS contacting you about your taxes, do not pass go, do not collect $200, do not click on any links, do not do anything but DELETE that email. Have I made myself clear?! What you can do is forward that email to phishing@irs.gov, and they will investigate it. IRS has more information available at http://www.irs.gov/privacy/article/0,,id=179820,00.html

Return Preparer Fraud-unfortunately one bad apple can make taxpayers wonder about all the other legitimate tax preparers out there (yours truly included). Here are a few things to look out for that may indicate the preparer is unscrupulous
-doesn’t sign the return or put an identifying number on it
-doesn’t give you a copy of your tax return
-promises a larger than normal refund
-charges a percentage of the refund as a fee
-encourages the taxpayer to place false information on a return, such as false deductions.

For purposes of brevity, I’ll wind things up now. The key thing to remember here is to always stay alert with your personal information, and if something smells fishy, it probably is. IRS has a YouTube video with more information about this topic. You can see it at http://www.youtube.com/watch?v=10D1XqVmIW0

Please pass this information along to others, since this is something that could affect all taxpayers. Let me know if you have any questions, and if you have any comments, please post them to this blog. Be careful out there!