18 Taxation

bond amortization and accretion is in a different flashcard set

short term capital gains rate

ordinary income tax bracket

long term capital gains rate

0%, 15%, or 20% depending on income

qualified dividends

capital gains rate

non qualified dividends

ordinary income rate

options taxation

1. expiration - long position is capital loss, short is capital gain. usually short term

2. closed out - treated like stock trade, capital gain or loss

3. exercised - new cost basis or capital gain / loss

corporate bond interest payments

interest taxed as ordinary income, if sold for profit also capital gains

agency interest, CMO interest, mortgage backed securities interest payments

interest taxed at ordinary income rates, all subject to taxes on federal and state level

zero coupon bonds

portion of discount taxable each year at ordinary income rate

mutual funds

• capital gains distributions once a year → taxed as capital gains (short or long depends how long the fund held the security)

• dividends are either qualified or unqualified, depends on source (usually qualified)

• if fund sells securities within for a profit, capital gains tax

• never distribute capital loss!

annuity random withdrawal

LIFO method, earnings taxable at ordinary income rate (if non qualified which most are), also if before age 59.5 then 10% penalty tax unless

• cant work bc disability

• used for certain qualified medical expenses

• if money is removed in series of substantially equal payments (must continue for 5 years)

annuity death benefit

• if beneficiary receives death benefit greater than owners cost basis, only earnings are taxable at income tax rate. may be subject to estate tax

annuitization for non qualified annuity

ratio will determine how much is principal and earnings. principal is not taxed and earnings are taxed at ordinary income rate

annuitization for qualified annuity

all taxable at ordinary income rate

life insurance cash withdrawal

FIFO is used, principal first and earnings last. principal is not taxed, earnings are at ordinary rate

life insurance death benefit

death benefit is included in estate and will be subject to estate tax, beneficiary will not have to pay income tax

REIT dividends and return of capital

• dividends are taxed at ordinary income rates, not dividend rates (unless qualified but they never are)

• return of capital lowers cost basis

charitable donations of securities

• less than 1 yr held: deduct fair market value

• over 1 yr held: deduct cost of securities

estate tax

• person who inherits is not subject to estate tax, the estate is

• stepped up cost basis as of date of death

gift tax

• paid by donor

  • recipient cost basis for securities is lower of givers cost basis or fair market value at time of gift and uses givers holding period

annual gift tax exclusion

• $18K for 2024, $19K for 2025

• only after annual exclusion is used will lifetime start to be used

muni bond tax swap

to be determined a wash sale must be bought back within 30 days and have 2/3:

• same or similar issuer

• same or similar interest rate

• same or similar maturity date

what are REITS regulated under

subchapter M, if qualifies does not pay tax on distributed net income

how to REITS qualify?

• at least 75% of income in real estate

  • property rentals, mortgage interest, gains on property sales, refunds of real estate taxes, income & gain on foreclosed property

• at least 75% of assets in real estate

• at least 90% of net investment income distributed

  • if fails, all net investment income is taxable, if does pay tax on undistributed portion

• 95% gross income must come from real-estate related income or dividends and income from other sources (like investments)

• minimum 100 shareholders and managed by board of trustees

K-1 form

filled out for each partner, details partners share of income and loss for the year

items that establish basis for a limited partner

basis is established when a capital contribution is made, this includes

• contributing cash to partnership

• contributing property to partnership

• assuming recourse debt for all partnerships (signs note with lender for which they are personally liable)

• assuming non recourse debt for real estate partnerships (if mortgage is taken against real estate, included in cost basis)

once established, partnership operates through year with results on K-1

items that increase the basis

• additional contributions of cash or property made during year

• additional recourse debt taken during year

• additional not recourse debt taken on for real estate only during year

• distributive share of net income allocated to you during year (accounting income that increases value of your interest in partnership, not cash distribution)

items that reduce basis

• distributions of cash or property to partners, takes value out of partnership and decreases basis

• repayment of recourse debt

• repayment of non recourse debt for real estate only

• distributive share of net losses allocated to you during year (accounting losses, reduce value of interest in partnership)

how does basis establish deduction limit

net losses are deducted last, items like operating expenses, interest expense, depreciation, depletion, etc in excess of any income received. if net losses exceed remaining basis the excess losses cant be deducted, basis can only be reduced to zero. any excess loses are carried forward and can be used for next year if basis increases

phantom income on a DPP

if a unit with an outstanding loan is abandoned, loan is taken out of selling proceeds.

recapture DPP

what the IRS gives with one hand it takes back with the other, anything sold which has had deductions taken against it will be taxed for all deductions upon sale

corporations tax benefits

• dividends: receive a 50% or more tax deduction on dividends they receive from other corporations, known as dividends received deduction

• bonds: interest is deductible against a corporations corporate taxes (paying), so no taxes are paid when issuing (even from proceeds) or paying bonds

1099-DIV

details cash dividends paid, cash dividends that qualify for lower tax rates, and capital gains distributions paid by investment companies and REITS

1099-INT

interest paid by bond issuers is reported here

what cost basis method does IRS assume when selling stock?

FIFO unless stated otherwise by settlement date

what method does IRS assume when selling mutual fund shares?

average cost basis unless stated otherwise by settlement date