Capital Gains Tax ©2010 Dr. B. C. Paul

What is a Capital Gain The Difference Between an asset selling price and its book value. Where does it occur? –The IRS depreciates goods to zero value – what if there is a non-zero salvage value –Assets that hold value Stock or Land do not depreciate They can go up or down in value

Capital Gains Amount Since assets can go up or down in value it is possible for a capital gain to be either a positive or a negative number. Since the Government taxes capital gains, capital gains can either raise or lower your tax liability.

Capital Gains are taxed only when they are realized –Ford family heirs may have seen stock value go up 50 fold – but the event is taxed only when it is sold or transferred Capital Gains are treated as a separate pot of money –You cannot mix it with income –If you have $200,000 of taxable income –And a $200,000 Capital Loss the loss cannot offset the income tax. How Are Capital Gains Taxed

Capital Gains Tax Rates Capital Gains tax rates for individuals are lower than ordinary income –If my income tax bracket is 20% my capital gains tax rate may only be 10% Capital Gains tax rates for corporations are the same as income tax rates –Corporations do move assets and products.

Capital Loss Events Add up all your capital gains and add up all your losses – Get a Total –Capital losses cancel capital gains – not income For an individual you can deduct $3,000 against your income –Otherwise you “carry forward” and the loss offsets the next capital gain

Capital Losses for Corporations Capital Gains are a Separate Money Pot –They cannot mix with income Corporations can “carry back” up to 3 years –If you had a capital gain three years ago you can file an amended return against that income Corporations can “carry forward” up to 5 years –First year they make income the loss can be taken If you go 8 years with no capital gains you are out of luck.

Plague of the Accountants Tax deductions stored up from losses are used as “assets” to sweeten company balance sheets Fanny Mae and Freddie Mac were made to look fairly solvent –In fact most of their assets keeping them afloat were tax losses for companies that were loosing money and probably would never get to claim them.