©2015, College for Financial Planning, all rights reserved.

Session 12Capital Gains and Losses, and Investment Interest Expense

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning

Session Details

Module 6

Chapter(s)

3 and 4

LOs 6-5 Analyze a situation to calculate the net capital gain or loss for a set of security transactions by an individual.

6-6 Analyze a situation to identify an income tax implication of a security transaction.

6-7 Analyze a situation to calculate the amount of investment interest expense that is deductible.

12-2

Capital AssetsDefined by exception; all assets except:• Inventory • Depreciable and real property used in a

trade or business• Supplies regularly used or consumed in

the taxpayer's trade or business• A copyright; a literary or artistic

composition; a letter, memorandum, or similar property held by the author or creator, or by donee

• Accounts or notes receivable acquired in the ordinary course of trade or business

• U.S. government publications12-3

Net Capital Gain or Loss• Net loss of $3,000 allowable per year• Net LTCG taxed at:

o 0% if gain is in 10% or 15% marginal rateo 15%, if gain falls into 25%-35% MITBo 20% if gain falls into 39.6% MITB

• Collectibles (maximum rate of 28%) o coins, stamps, artwork, etc.

• Depreciation on realty (unrecaptured §1250 income—maximum rate of 25%)

• Net STCG treated as ordinary income• Netted in most favorable manner• Capital loss on personal use assets-no

deduction12-4

LTCG—0% and 15%

12-5

Jim and Patty are married taxpayers filing jointly. They have $40,000 of ordinary income and $30,000 of net long-term capital gains from the sale of securities. They have only their two exemptions, and they claim the standard deduction.Sam and Sally are married taxpayers filing jointly. They have $40,000 of ordinary income and $60,000 of net long-term capital gains from the sale of securities. They have only their two exemptions, and they claim the standard deduction.

LTCG—15% and 20%Bob and Barb are married taxpayers filing jointly. They have $200,000 of ordinary income (after all deductions and exemptions) and $100,000 of net long-term capital gains from the sale of securities.

Roy and Kathy are married taxpayers filing jointly. They have $200,000 of ordinary income (after all deductions and exemptions) and $400,000 of net long-term capital gains from the sale of securities.

12-6

Netting Capital Gains & Losses

12-7

Basis in Mutual Fund Shares

Average Cost Method • Divides total cost of all shares by number of

shares owned, resulting in all shares having same cost basis

• Gain or loss computed from sales proceeds of shares sold less average cost times shares sold

First-In, First-Out (FIFO) • Presumably lower-cost shares purchased first

are used in computing gain or loss from sale

• Generally least advantageous method to investor

12-8

Basis in Mutual Fund Shares

Specific Identification• Investor identifies the particular shares

that are being sold (by purchase date)• Identifying highest cost basis shares

results in lowest gain on sale • Identifying lowest cost basis shares

results in lowest loss on sale• Stock sales must use specific

identification

12-9

U.S. SecuritiesGenerally, no state or local income taxT-bills• short-term• sold at discount• taxable at maturity

Treasury Notes and Bonds• interest taxable when received

Treasury Inflation-Indexed Securities• interest payments taxed when received• inflation adjustments taxed in year of

adjustment, although not paid until maturity

12-10

Wash Sale Rule• Disallows (defers) loss if

substantially identical securities purchased within 30 days before or after loss sale

• Basis of new securities increased by disallowed loss

• Holding period “tacked”• Not substantially identical

if different issuer or obligor• Effect of Rev. Ruling

2008-512-11

Investment Interest Expense

• Investment interest expense: deductible up to amount of net investment income

• Investment interest expense: interest on debt incurred to purchase investments

• Investment income: primarily interest; LTCG and qualified dividends included only if taxpayer elects for preferential rates to not apply

• Net investment income: investment income reduced by other deductible investment expenses (Tier II investment expenses AFTER 2% AGI)

• No deduction if funds borrowed to purchase muni bonds

12-12

Investment Interest Expense

Assume:

• investment interest expense of $20,000,

• interest income of $15,000, AGI of $65,000, and

• investment adviser fees of $2,000.

12-13

Investment income $15,000

Investment expenses (Tier II) $2,000

2% AGI 1,300

Deductible investment expenses

$700

Net investment income $14,300

Review Question 1

Which one of the following is a correct statement regarding the wash sale rules?a. The basis of the acquired securities is

increased by the disallowed loss.b. Small differences in the maturity dates

of bonds will not cause them to be classified as substantially identical.

c. The wash sale rules do not apply to sales and investments in mutual funds.

d. The wash sale rules do not apply to sales and investments in ETFs.

12-14

Review Question 2

Which one of the following is not currently a long-term capital gains rate?a. 0%b. 10%c. 15%d. 20%e. 25%

12-15

Review Question 3

This year, Ken Bush sold several securities that left him with the following types of gains and losses: o long-term capital gain—$8,000o short-term capital gain—$1,800o long-term capital loss—$2,200o short-term capital loss—$1,000What is the net capital gain or loss on Ken’s security sales?

a. net long-term loss of $1,400b. net long-term gain of $2,320, and net short-term

gain of $800c. net long-term gain of $2,640d. net long-term gain of $5,800, and net short-term

gain of $800e. net long-term gain of $6,600

12-16

Review Question 4

Which one of the following statements is incorrect regarding investment interest expense?a. Investment interest expense is deductible up

to the amount of the net investment income.b. Excess investment interest expense cannot

be carried forward into succeeding tax years.c. Interest paid or accrued to purchase or carry

tax-exempt investments is not deductible.d. Net investment income is the excess of

investment income over investment expenses.

12-17

Review Question 5

For the current tax year, Bob Phillips, an individual taxpayer filing a joint return, has $50,000 of investment interest expense and $20,000 of net investment income (interest income). Bob paid commissions of $1,500 during the current year. How much investment interest expense, if any, may Bob deduct in the current tax year?a. $0b. $18,500c. $20,000d. $48,500e. $50,000

12-18

©2015, College for Financial Planning, all rights reserved.

Session 12End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning