Archive for the ‘Taxation of Investments’ Category

Tax Rules Extended by ATRA

January 12, 2013

The American Taxpayer Relief Act of 2012 provides “taxpayer relief” primarily by extending tax benefits that were scheduled to expire. Here is a list of the extensions that are of most interest to individual taxpayers. Changes labeled “permanent” can be altered by an Act of Congress but will not expire automatically.

ATRA Tax Rates for Capital Gain and Dividends

January 12, 2013

The American Taxpayer Relief Act of 2013 (“ATRA”) made important changes in the way long-term capital gain and qualified dividend income are taxed. Here’s an explanation, in Q&A format.


American Taxpayer Relief Act

January 3, 2013
By Kaye A. Thomas

In a last gasp effort Congress passed legislation to avert the fiscal cliff and prevent tax increases on 98% of Americans. Key features of the American Taxpayer Relief Act of 2012 (“ATRA”) include the following:

  • Existing income tax rates (including marriage penalty relief) are preserved for taxpayers with income up to $400,000 ($450,000 for couples filing jointly). A tax rate of 39.6% applies above that level.
  • Qualified dividends will continue to be taxed at capital gain rates, but a 20% rate will apply to both of these beginning at the income thresholds mentioned above.
  • The personal exemption phaseout and the Pease rule for reducing itemized deductions are revived, but at higher income levels than under prior law.
  • The law permanently fixes the alternative minimum tax (“AMT”), eliminating the recurring need for an “AMT patch.”
  • Seemingly out of nowhere, the law expands the availability of in-plan Roth conversions.
  • The estate tax provisions are more generous than might have been expected, retaining the $5 million exemption and raising the rate by only 5 percentage points, to 40%.


Demutualization Soup: Another Ruling

July 25, 2012
By Kaye A. Thomas

Nearly four years after the first ruling in a demutualization case we have another one—and it’s inconsistent with the first one. At issue is the proper treatment of taxpayers who receive shares of stock when a mutual insurance company that issued policies to them converts into a regular corporation. The IRS has long taken the position that these shares have zero basis, so that when they are sold, the entire proceeds must be reported as capital gain. The Court of Federal Claims rejected that position in 2008, and in addition found that the open transaction doctrine applied, so that the selling shareholders would report zero gain on the sale.


Confession is Good for the — Taxpayer?

May 23, 2012
By Kaye A. Thomas

How much relief can you expect from the IRS when you inform them that you claimed a deduction to which you weren’t entitled? What if you informed them only after learning your return was about to be audited? You might expect the IRS to go into Terminator mode in a case like this, but here’s someone who received a different response. (more…)

Coming Clean on Wash Sales

May 10, 2012
By Kaye A. Thomas

This tax season — the one that just ended for those lucky enough to have filed on time, and the one still painfully dragging on for those who filed for an extension — is the first for which brokers are required to report cost basis, in addition to gross proceeds, on Form 1099-B. An important part of the requirement is that brokers must apply the wash sale rule, which prevents you from claiming a loss on a sale of shares if you buy identical shares within 30 days before or after. Anyone who does a lot of buying and selling might wonder whether the broker applied this rule correctly. You may be surprised to learn that there’s no way to be sure. The wash sale rule is a lot more complicated than it appears, and there are unanswered questions about some aspects of its workings. (more…)

Trusted but Discredited

May 10, 2012

In a brief summary opinion (PDF) the Tax Court held that an individual who otherwise qualified for the first-time homebuyer credit would not be allowed to claim it because he bought the home from a family trust that was a “related person” for purposes of these rules. The taxpayer argued that the credit should be allowed where the trustee and the homebuyer are not the same individual, but the court rejected that argument.

Taxation of ETF Options

May 31, 2011

There are two sets of rules for taxation of options. One set, which might be called the regular rules, applies to options to buy or sell stock in a company. Different rules apply when options qualify as section 1256 contracts. Section 1256 of the Internal Revenue Code offers unique treatment for these options:

  • Capital gain or loss is treated as 60% long-term and 40% short-term without regard to how long you held the option.
  • Any positions you hold at the end of the year are marked to market, which means you report gain or loss based on their current value even though you haven’t sold them.

If you use options in your investment strategy, it may be important to know whether options to buy or sell shares in exchange-traded funds, or ETFs, are treated as regular options or section 1256 contracts. The answer: it depends. (more…)

Tax Court Says Day Trading Is Dissipation

March 25, 2011

If you find yourself owing the IRS more than you can possibly pay, you may be able to settle for a reduced amount through a procedure called an offer in compromise. The IRS doesn’t always agree, however. Among other possible reasons, they may reject an offer in compromise if it appears you dissipated assets, consuming or wasting money that could have been used to pay your debt to the government. In a recent case, the Tax Court ruled that the IRS can treat losses incurred in day trading as dissipation. The result is unusual because people who take up day trading generally do so with the thought that they’ll make a profit, rather than fritter money away. (more…)

IRS Heard it Through the Grapevine: Pay Up!

March 14, 2011

Suppose you sell a business for $10,000,000, claiming your basis is $10,000,000 when it’s actually closer to $1,000,000. You’ll have to pay tax on that $9,000,000 difference (plus interest and penalties) if the IRS catches you before the statute of limitations runs out. How long do they have to catch you? The Supreme Court will probably have to step in and resolve this question, which has divided the Courts of Appeals. (more…)

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