Ten Facts about Capital Gains and Losses

Ten Facts about Capital Gains and Losses

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.

Here are 10 facts from the IRS on capital gains and losses:

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.

2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.

3. You must include all capital gains in your income.

4. You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.

5. Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a 'net capital gain.’ 

7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.

8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.

10. Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses. You will carry over the subtotals from this form to Schedule D, Capital Gains and Losses. If you e-file your tax return, the software will do this for you.

For more information about capital gains and losses, see the Schedule D instructions or Publication 550, Investment Income and Expenses. They are both available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

VIA IRS Tax Tip Issue #2013-28

6 Money Rules You Can Break

For most people, following basic money rules makes sense. But like everything else in life, there are situations when following tried-and-true advice might not work. Our professionals weigh in on when to consider the exceptions.

Rule No. 1: Pay off debt and build an emergency fund before saving for retirement.

Saving enough money to pay three to six months of living expenses will lessen the chances you'll have to sell assets or go into debt in case of an unexpected big-ticket expense or job loss. J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA, says building this emergency fund — in something safe and liquid, such as a savings account — should be a top priority, along with paying down any high-interest consumer debt.

When to break it: If your debt is of the low-rate, tax-reducing variety, such as a mortgage or student loans, and your retirement plan at work offers a match, you might be better off contributing enough to receive the full company match before focusing on building your emergency fund and eliminating debt, says Montanaro.

Remember that contributions to a traditional employer-sponsored retirement account, such as a 401(k) or Thrift Savings Plan, may reduce your tax bill. Add the money from your employer match, and you've got a hard-to-beat combination. If you don't participate in these plans, you could be missing out on valuable benefits and tax savings.

Rule No. 2: Save up to 10% of your income.

Contributing at least $1 to your savings (or 401(k) or TSP) for every $10 you earn — or 10% — is an old rule of thumb. And it's certainly better than 3.6%, which is the current national savings rate, according to the Commerce Department.

When to break it: If you didn't begin saving for retirement until you were in your 30s or older, it may take more effort to achieve your retirement goal.

"A late start means you’ve probably got ground to make up, and 10% is probably not enough to close the gap," Montanaro says. To find out how much you need to save to meet your financial goals, use USAA's online calculators.

Rule No. 3: Always max out your employer-sponsored account.

If you need to increase your retirement savings and are not already contributing the maximum amount allowed to your 401(k), a reasonable reaction is to immediately boost your contribution rate.

When to break it: To create a better tax-management plan, you may need to look beyond your employer's plan.

"If you don't have a Roth 401(k) available, you may be better off contributing just enough to take full advantage of a match (if your employer offers one), but then sending additional savings to a Roth IRA, if you're eligible," says Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA. A Roth contribution won't lower your tax bill today, but the possibility of qualified, tax-free withdrawals during retirement is a benefit.

"You'll likely have control over future income tax bills by having money in pretax and Roth accounts," adds Halliwell. What if your income exceeds the IRS limit for making Roth IRA contributions? Consider opening an after-tax traditional IRA and converting it to a Roth. Since 2010, income is no longer a factor in Roth IRA conversion eligibility. Conversions from a traditional IRA to a Roth are subject to ordinary income taxes. Please consult with a tax advisor regarding your particular situation.

Rule No. 4: Send your kid to college — it's a great investment.

Yes, the average college graduate earns $26,618 more a year than someone with just a high school education, according to the U.S. Census Bureau. As a result, most financial planners agree that helping your child get a college education is important.

When to break it: If helping pay for your child's four-year college degree places an extreme burden on your finances, you should consider other, more affordable ways to accomplish this goal.

The return depends on the price you pay and where that money comes from. The nonprofit research group Project on Student Debt reports two-thirds of college seniors who graduated in 2011 had student loan debt, with an average of $26,600 per borrower.

To avoid overpaying for a diploma, Montanaro suggests looking for cost-effective ways to get an education, such as spending the first two years at a community college, then transferring to a four-year college. For 2012-13 enrollment, annual tuition and fees at a community college cost an average of $3,131, compared to in-state tuition of $8,655 for public four-year colleges and $29,056 for private universities, according to the College Board.

Rule No. 5: Buy a house if it costs 2.5 times your annual income or less.

This is a reasonable guide when determining whether you can afford to buy a home.

When to break it: If it doesn't suit your circumstances, disregard this guideline.

What really matters is whether you can afford the monthly payment, factoring in taxes, insurance, maintenance, current mortgage rates and the size of your down payment. Plus, consider how long you'll live in the house. If you plan to move in a few years, renting may be the better decision.

Rule No. 6: When you retire, consider a withdrawal of 4% of your portfolio, then adjust every year for inflation.

Historically speaking, the so-called 4% rule calls for a retiree to make annual inflation-adjusted withdrawals and be reasonably sure the portfolio will last 30 years. For most retirees, it's a fine starting point to determine how much they can spend.

When to break it: Your plan for retirement is not a smooth glide path.

Retirees may prefer withdrawing more in good times and cutting back when times get tough, or varying distributions based on their investment results. Also, adjustments should be made according to other sources of income. For example, Montanaro says some retirees may wish to withdraw more at first and delay taking Social Security, but then withdraw less once the Social Security benefit kicks in. "Whatever your plan, it should be monitored and adjusted as necessary," he says.

USAA's Retirement Center offers financial advice and recommendations to help you plan your future. For guidance, email an advisor or call 1-800-472-8722 Monday through Friday from 7:30 a.m. to 10 p.m. and Saturday from 8 a.m. to 5 p.m. Central Time.

Reprinted from USAA.com https://www.usaa.com/inet/pages/advice-finances-moneyrules?EID=corp_cc_13_03_U250-08

The ABCs of Baby Finance

Raising a child from birth through age 17 will cost a typical middle-income family almost $235,000, according to a 2012 report from the U.S. Department of Agriculture.

Consider the following advice to help you plan for your financial future, prepare for your new baby and protect your growing family.

1. Purchase life insurance. Life insurance is a foundation of financial preparedness and much more affordable than you might think. You should generally get better rates when you're young. Talk to your life insurance company about what amount will protect your family.

Saving for retirement, however, should take priority over saving for your child's college education. Student loans and part-time jobs abound for the college crowd, but loans generally cannot be used for retirement.

2. Start planning for college in the delivery room. The average cost of tuition and fees for the 2011-12 school year was $8,244 for a public college and $28,500 for a private one, according to the College Board. Financial aid and part-time jobs may help your child pay for college. Parents who want to chip in may consider setting aside some money today in a tax-advantaged 529 college savings plan.

3. Update your will and appoint a guardian. Name a contingent guardian and update your will to give your family some protection in case something happens to you.

4. Take advantage of tax savings. The IRS allows you to take an exemption for dependent children, including those born or adopted anytime during the year. Depending on your income, you may also be entitled to a child tax credit for each qualifying child under age 17. Parents who work and pay for day care for their dependent children also may be able to take advantage of a child-care credit. If you work, visit the IRS withholding calculator to see if you should adjust the income tax withheld from your paycheck.

5. First-time parents? Prepare your baby budget now. Long before the due date, examine how your baby will affect everyday expenses. Stroll through baby stores, take notes, then redo your annual budget to include the new line items. This exercise can help you figure out if you need to cut spending in other areas.

6. Experiment with living on one income. If one parent is thinking of leaving the workplace to care for the baby at home, try living on one income, well before the baby arrives, to see how feasible it is.

7. Say bye-bye to brand names. Your baby won't know the difference between top-of-the-line baby blankets and less expensive, quality ones that feel just as snuggly. Hand-me-downs, consignment shops, garage sales and even eBay are great sources for gently used, quality children's clothes at bargain prices.

8. Think twice before buying a new home. A new home for your growing family sounds tempting, but you could find yourself baby-rich and house-poor. Not moving at all might be better, at least for a while.

9. Accept baby-sitting offers. Among the best financial assistance relatives and friends can give is volunteering to baby-sit. If they offer, graciously accept.

10. Use a flexible spending account for day care. If your employer offers a flexible spending account, you may be able to use it to pay up to $5,000 in child-care expenses a year. That money will be exempt from income taxes.

Reprinted from USAA.com https://www.usaa.com/inet/pages/advice-finances-abcsofbabyfinance?EID=corp_cc_13_03_U250-06

13 Deductions That Could Cut Your Tax Bill

For all the talk about tax changes at the end of 2012, many people are still left wondering what it means for them.

" 'Is it a big deal? Or is it business as usual?' are questions I'm hearing," says Scott Halliwell, CERTIFIED FINANCIAL PLANNER™ practitioner with USAA.

"While many issues were resolved, a lot of taxpayers still aren't sure how their tax returns and deductions are affected," he says.

If you're one of those people, brush up on these 13 deductions before tackling your tax return. They are worth reviewing, as they could lower your tax bill.

1. Traditional IRA contributions. You have until April 15, 2013, to contribute up to $5,000 to a traditional IRA for 2012 and, if you qualify, deduct it on your tax return. Here are some guidelines:

• If you were 50 or older on the last day of 2012, you can contribute up to $6,000.
• If you (and your spouse if you're married) weren't covered by an employer's retirement plan in 2012, you can generally deduct your contribution in full.
• If you were covered by an employer plan, you can only take a full deduction if your modified adjusted gross income was $58,000 or less ($92,000 or less for married couples filing jointly). Your deduction is reduced if your modified adjusted gross income was more than $58,000 but less than $68,000 ($92,000 and $112,000 for married couples filing jointly). Above those levels, you may still contribute, but you can't take a deduction.
• If your spouse was covered by a retirement plan at work but you weren't, you're eligible to take a full or partial deduction if your combined adjusted gross income was below $183,000. SeeIRS Publication 590 for more details.

2. Self-employed retirement plans. If you work for yourself, you can open a Simplified Employee Pension IRA by April 15, 2013, and deduct your contribution on your 2012 return.SEP IRAs may be an easy way to create your own retirement plan, and they can allow much higher contributions than traditional IRAs. Contributing to a SEP IRA does not exclude you from making an IRA contribution, but it may affect whether you can take a deduction for it. (A SEP IRA is considered an employer-sponsored plan).

3. Mortgage interest. You're allowed to deduct interest paid on your primary mortgage, as well as home equity loans, home improvement loans and lines of credit. In general, you may deduct interest on up to $1 million of primary mortgage debt and up to $100,000 of home equity balances.

4. State and local taxes. The federal government generally allows taxpayers to deduct property and income taxes paid to state and local governments.

5. Sales tax. If you didn't pay much state income tax — or live in a state that doesn't tax income at all — you may be able to choose to deduct sales tax instead. And you typically don't need receipts — simply calculate an assumed amount using an IRS table or online calculator.

6. Charitable gifts. Donations to charity may ease your tax burden, but only if you have the right documentation. Cash contributions — regardless of the amount — require a canceled check or dated receipt. Any contribution of $250 or more requires bank or payroll deduction records or a written acknowledgement from the charity. Noncash contributions valued at more than $5,000 generally require an appraisal.

7. Education costs. Up to $2,500 in interest on loans for qualified higher education expenses may be deductible if your adjusted gross income is less than $75,000 ($150,000 if you're married and filing a joint return). A portion of your tuition and fees may be deductible if your adjusted gross income is $80,000 or less ($160,000 on a joint return). There are also two tax credits for college costs: the American Opportunity Credit and the Lifetime Learning Credit (See IRS Publication 970).

8. Medical and dental costs. The government sets a high hurdle for these expenses: You may be able to only deduct them if they exceed 7.5% of your adjusted gross income. Be aware that the Patient Protection and Affordable Care Act decreases this deduction for the 2013 tax year because those expenses generally will be deductible only if they exceed 10% of your adjusted gross income. The law does include a temporary waiver for seniors and their spouses if either has reached age 65 before the close of tax years 2013-2016.

9. Health insurance. Self-employed taxpayers get a break on one of their biggest financial headaches. In general, they may be able to deduct all of their health insurance premiums.

10. Health savings accounts. If your family was covered by a high-deductible health insurance plan in 2012, you may be able to contribute up to $6,250 to a health savings account ($3,100 if it only covered yourself). Contributions are deductible, and withdrawals for qualified medical expenses are tax-free. Similar to IRAs, you have until April 15, 2013, to contribute for the 2012 tax year.

11. Job-related moving expenses. If you moved to take a new job, you may be able to deduct your expenses if you pass these two IRS tests:

• Your new job must be at least 50 miles farther from your old home than your old job. If you didn't have a previous job, your new one must be at least 50 miles from your old home. If you're in the military with permanent change of station orders, you do not have to meet these rules.
• If you're an employee, you must work full time for at least 39 weeks during the 12 months after you arrive in the general area of your new job. If you're self-employed, you have to work full time for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months.

12. Guard and Reserve travel expenses. If you traveled more than 100 miles to attend a drill and spent the night, you may be able to deduct lodging expenses, half the cost of your meals and 55.5 cents per mile for travel. You also can deduct tolls and parking fees.

13. Out-of-pocket teacher expenses. Teachers, aides, counselors and principals — kindergarten through 12th grade — should be able to deduct up to $250 for classroom supplies purchased in 2012.

Reprinted from USAA.com  https://www.usaa.com/inet/pages/advice-taxes-taxdeductions?EID=corp_cc_13_03_U250-04&akredirect=true 

Medical and Dental Expenses on 2012 Tax Return

Excerpt from IRS Tax Tips Issue 2013-25

Seven Important Tax Facts about Medical and Dental Expenses

If you paid for medical or dental expenses in 2012, you may be able to get a tax deduction for costs not covered by insurance. The IRS wants you to know these seven facts about claiming the medical and dental expense deduction.

1. You must itemize.  You can only claim medical and dental expenses for costs not covered by insurance if you itemize deductions on your tax return. You cannot claim medical and dental expenses if you take the standard deduction.

2. Deduction is limited.  You can deduct medical and dental expenses that are more than 7.5 percent of your adjusted gross income.

3. Expenses paid in 2012.  You can include medical and dental costs that you paid in 2012, even if you received the services in a previous year. Keep good records to show the amount that you paid.

4. Qualifying expenses.  You may include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Visit IRS.gov for more details.

5. Costs to include.  You can normally claim the costs of diagnosing, treating, easing or preventing disease. The costs of prescription drugs and insulin qualify. The cost of medical, dental and some long-term care insurance also qualify.

6. Travel is included.  You may be able to claim the cost of travel to obtain medical care. That includes the cost of public transportation or an ambulance as well as tolls and parking fees. If you use your car for medical travel, you can deduct the actual costs, including gas and oil. Instead of deducting the actual costs, you can deduct the standard mileage rate for medical travel, which is 23 cents per mile for 2012.

7. No double benefit.  Funds from Health Savings Accounts or Flexible Spending Arrangements used to pay for medical or dental costs are usually tax-free. Therefore, you cannot deduct expenses paid with funds from those plans.

You’ll find more information in IRS Publication 502, Medical and Dental Expenses. Also see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. They are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• Publication 502, Medical and Dental Expenses
• Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans

IRS YouTube Videos:

• Medical and Dental Expenses - English | Spanish | ASL

IRS Podcasts:

• Medical and Dental Expenses - English | Spanish

Updated Interest Rates 2013

Excerpt IRS Tax Tips Issue 2013-24

Interest Rates Remain the Same for the Second Quarter of 2013

WASHINGTON – The Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning Apr. 1, 2013.  The rates will be: 

• three (3) percent for overpayments (two (2) percent in the case of a corporation);
• three (3) percent for underpayments;
• five (5) percent for large corporate underpayments; and
• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. 

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate determined during January 2013 to take effect February 1, 2013, based on daily compounding.

Revenue Ruling 2013-6, announcing the rates of interest, is attached and will appear in Internal Revenue Bulletin 2013-13, dated March 25, 2013.

Voluntary Worker Classification Settlement Program

Excerpt from IRS Tax Tips Issue 2013-23

IRS Expands Voluntary Worker Classification Settlement Program; Relief From Past Payroll Taxes Available to More Employers Who Reclassify Their Workers As Employees

WASHINGTON — The Internal Revenue Service has expanded its Voluntary Classification Settlement Program (VCSP) paving the way for more taxpayers to take advantage of this low-cost option for achieving certainty under the law by reclassifying their workers as employees for future tax periods.

The IRS is modifying several eligibility requirements thus making it possible for many more interested employers, especially larger ones, to apply for this program. Thus far, nearly 1,000 employers have applied for the VCSP which provides partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees. Businesses, tax-exempt organizations and government entities may qualify.

Under the revamped program, employers under IRS audit, other than an employment tax audit, can qualify for the VCSP. Furthermore, employers accepted into the program will no longer be subject to a special six-year statute of limitations, rather than the usual three years that normally applies to payroll taxes. These and other permanent modifications to the program are described in Announcement 2012-45 and in questions and answers, posted on IRS.gov.

Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement. Details on this temporary change are inAnnouncement 2012-46.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of these workers or contesting the classification of the workers in court.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will generally pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Employers applying for the temporary relief program available for those who failed to file Forms 1099 will pay a slightly higher amount, plus some penalties, and will need to file any unfiled Forms 1099 for the workers they are seeking to reclassify.

More information is available on IRS.gov, keyword “VCSP.”

Your Unemployment Benefits

Excerpt from IRS Tax Tip Issue 2013-26

Four Tax Tips about Your Unemployment Benefits

If you received unemployment benefits this year, you must report the payments on your federal income tax return.

Here are four tips from the IRS about unemployment benefits.

1. You must include all unemployment compensation you received in your total income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount you were paid and the amount of any federal income taxes withheld from your payments.

2. Types of unemployment benefits include:

• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
• Railroad unemployment compensation benefits
• Disability payments from a government program paid as a substitute for unemployment compensation
• Trade readjustment allowances under the Trade Act of 1974
• Unemployment assistance under the Disaster Relief and Emergency Assistance Act

3. You must include benefits from regular union dues paid to you as an unemployed member of a union in your income. However, other rules apply if you contribute to a special union fund and your contributions are not deductible. If this applies to you, only include in income the amount you received from the fund that is more than your contributions.

4. You can choose to have federal income tax withheld from your unemployment benefits. You make this choice using Form W-4V, Voluntary Withholding Request. If you complete the form and give it to the paying office, they will withhold tax at 10 percent of your payments. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.

For more information on unemployment benefits see IRS Publications 17, Your Federal Income Tax, or IRS Publication 525, Taxable and Nontaxable Income. You can download these free booklets and Form W-4V from the IRS.gov website. You may also order them by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• Publications 17, Your Federal Income Tax
• Publication 525, Taxable and Nontaxable Income
• Form W-4V, Voluntary Withholding Request

First Time Homebuyer Credit Repayment

Below is a helpful article from the IRS about repaying your first time homebuyer credit. If you purchased a home in 2008 and received the first time homebuyer credit, read below and be in touch with me if you have any questions on your specific situation.

Tax season is upon us! The sooner you meet with your tax professional to put together the relevant documents and information you need to complete your 2012 return, the better!!


Excerpt from IRS Tax Tip 2013-23...

First-Time Homebuyer Credit Look-up Tool
Helps Taxpayers Who Must Repay the Credit

The IRS no longer mails reminder letters to taxpayers who have to repay the First-Time Homebuyer Credit. To help taxpayers who must repay the credit, the IRS website has a user-friendly look-up tool. Here are four reminders about repaying the credit and using the tool:

1. Who needs to repay the credit?  If you bought a home in 2008 and claimed the First-Time Homebuyer Credit, the credit is similar to a no-interest loan. You normally must repay the credit in 15 equal annual installments. You should have started to repay the credit with your 2010 tax return.

You are usually not required to pay back the credit for a main home you bought after 2008. However, you may have to repay the entire credit if you sold the home or stopped using it as your main home within 36 months from the date of purchase. This rule also applies to homes bought in 2008.

2. How to use the tool. You can find the First-Time Homebuyer Credit Lookup tool at IRS.gov under the ‘Tools’ menu. You will need your Social Security number, date of birth and complete address to use the tool. If you claimed the credit on a joint return, each spouse should use the tool to get their share of the account information. That’s because the law treats each spouse as having claimed half of the credit for repayment purposes.

3. What the tool does. The tool provides important account information to help you report the repayment on your tax return. It shows the original amount of the credit, annual repayment amounts, total amount paid and the remaining balance. You can print your account page to share with your tax preparer and to keep for your records.

4. How to repay the credit.  To repay the First-Time Homebuyer Credit, add the amount you have to repay to any other tax you owe on your federal tax return. This could result in additional tax owed or a reduced refund. You report the repayment on line 59b on Form 1040, U.S. Individual Income Tax Return. If you are repaying the credit because the home stopped being your main home, you must attach Form 5405, Repayment of the First-Time Homebuyer Credit, to your tax return.