CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Session 12
Capital Gains and Losses, and
Investment Interest Expense
©2015, College for Financial Planning, all rights reserved.
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 Assets
Defined 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 publications
12-3
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 rate
o 15%, if gain falls into 25%-35% MITB
o 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 deduction
12-4
LTCG—0% and 15%
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.
12-5
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
Net short-term
capital gains
with short-term
capital losses.
Net long-term
capital gains
with long-term
capital losses.
If gain and loss,
net again.
If the result of
Step 3 is a loss,
the maximum
allowed is the
smaller of
$3,000 or
ordinary income.
If there are
short- and longterm gains, leave
separate.
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. Securities
Generally, no state or local income tax
T-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
2008-5
12-11
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.
Investment income
Investment expenses (Tier II)
2% AGI
Deductible investment expenses
Net investment income
$15,000
$2,000
1,300
$700
$14,300
12-13
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—$8,000
o short-term capital gain—$1,800
o long-term capital loss—$2,200
o short-term capital loss—$1,000
What is the net capital gain or loss on Ken’s security sales?
a. net long-term loss of $1,400
b. net long-term gain of $2,320, and net short-term gain of
$800
c. net long-term gain of $2,640
d. net long-term gain of $5,800, and net short-term gain of
$800
e. 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. $0
b. $18,500
c. $20,000
d. $48,500
e. $50,000
12-18
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Session 12
End of Slides
©2015, College for Financial Planning, all rights reserved.