Investment Income
Tom Tosuksri, Cleveland Housing Network
1
Investment Income
• Investment income is non-earned income from a
variety of sources. Depending on the source, this
may be a basic or advanced return
• BASIC Investment Income
o Interest from bank accounts or savings bonds, Dividends
o Schedule B
• ADVANCED Investment Income
o Capital Gains from the sale of Stocks, Bonds or Real Estate
o Schedule D, Form 8949, Cap Gn Wkt
• OUT OF SCOPE Investment Income
o Rental Income
o Schedule E
2
Basic Investment Income
• Interest from bank accounts or savings bonds,
Dividends
• Schedule B has three parts:
• I. Interest
o 1a: Seller Financed Mortgages (not typical, for land contracts)
o B-G: Other interest: Link from one of these lines to Interest Stmt
• II. Ordinary Dividends
o A-J: Link from one of these lines to Dividend Stmt
• III. Foreign Accounts and Trusts
o Not typical in our population
3
Capital Gains
• IRS calculates and taxes based on the Gain of any
transaction, not the proceeds
• Negative Capital Gain is counted as a loss, can be
used to offset other income up to $3,000, and can
be carried over to a future year
• Includes sales of Stocks, Bonds, Real Property
• If Capital Gains exceeds $3,350, no longer eligible
for Earned Income Credit
• Short Term: Held for 1 year and under
• Long Term: Held for over 1 year
• System calculates using Purchase/Sale dates
4
Capital Gains
• Capital Gain transactions are reported on form
1099-B, Sale or Disposition of Stocks, Bonds
• Form will include:
• Sales Date, Net Proceeds, Shares Sold, Price/Share
o Commission should be deducted from the Sales price, ‘cost of sale’
• Purchase Date, Purchase Price, Shares bought,
Price/Share
o Commission should be added to the Purchase Price, ‘cost of buying’
•
•
•
•
Capital Gain = Net Proceeds –Cost Basis
Net Proceeds = [(Shares Sold x Sales Price/Share) – Sales Commission]
Cost Basis = Shares Sold x Original Cost/Share
Original Cost/Share = [(Shares Bought x Purchase Price/Share) + Sales Commission] ÷
Shares Bought
5
Capital Gains
• Example:
•
•
Ted purchased 200 shares of ABC stock on October 15th, 2012 at $10 per share. His broker
charged a $50 commission.
On February 5th, 2014, he sold 100 shares of ABC stock at $15 per share. He paid his broker
$25 in commissions for the sale.
•
What is Ted’s taxable gain?
•
Is it a Long Term or Short Term Capital Gain?
6
Capital Gains
Example:
1. Ted sold 100 shares. His net proceeds at the sale:
Net Proceeds = (100 shares x $15) - Commission $25 = $125
2. Since Ted purchased more than he sold, we will have to calculate his cost per share,
including commission:
Original Cost/Share = [(200 x $10) + $50] ÷ 200 = $10.25
3. Then, we calculate Cost Basis of the 100 shares sold:
Cost Basis = 100 shares x $10.25 = $102.50
4. Finally we calculate Capital Gain:
Capital Gain = $125 .00 - $102.50 = $17.50
Ted’s capital gain in this transaction is $17.50
7
Capital Gains
• The cost basis of inherited property is the fair market
value on the date of death, always long term.
• What if there is no Cost Basis?
o Sometimes, the brokerage firm does not have the cost basis. IRS will assume -0basis, which is not advantageous for our taxpayers
o First, determine whether or not it will affect the tax liability:
•
•
•
Does adding it change the refund or amount due?
Combined with other income, is it more or less than their Standard deduction and
Exemptions?
I.E., A taxpayer earning $2,500 in wages with a $2000 capital gain will not have a tax
liability thus would not benefit from finding the cost basis. If his capital gains were
$4000, though, he would benefit since he would be eligible for EIC.
o Second, ask for the best estimate of the purchase date
o Next, determine the Stock Symbol of the shares sold and look up the historical
price using Google Finance or other historical database
•
https://www.google.com/finance/stockscreener
o Finally, calculate an estimated cost basis, rounding down
o The brokerage firm can also be contacted to see if they have any additional
information regarding the history or transaction
8
Sale of Real Property
• When real estate is sold, it must be reported to the
IRS to determine whether it is a taxable event
• Sales of a Main Home fall under a special exclusion:
o
o
o
o
Gain of up to $250,000 ($500,000 if married) can be excluded
Any losses cannot be included
Must have owned the home for at least 2 years
Must have been the primary home for 2 of the past 5 years
• All others are treated as investment property, with
gains and losses reported similar to stocks
• Use Schedule D Wkt 2 to document sale of home in
addition to Cap Gn Wkt and Form 8949
• Visit: http://fiscalofficer.cuyahogacounty.us for real
estate information and past sales history
9