Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
Long-term capital gains are generally taxed at a preferential rate verses ordinary income to provide incentives for investors to make those capital investments, as well as encourage long-term business activity, and to offer compensation to investors for the effects of inflation and our high corporate income taxes. The favorable long-term capital gains rates provide an incentive for those of means to invest in the companies which grow the Country. For example, don’t many of you have mutual funds which own shares of Microsoft or General Motors?
From 1913 to 1921, capital gains were taxed at the same rate as ordinary income (seven percent). The difference in capital gains tax versus ordinary income began with World War I, and has been all over the place: from 1922 to 1934, 12.5 percent on assets held for at least two years; from 1934 and 1935, a 20 percent exclusion on gains for assets held for one year; a 40 percent exclusion if held for two years; a 60 percent exclusion if held for five years; a 70 percent exclusion if held for 10 years. There were additional changes in 1942, 1969, 1976, 1977, 1978, 1981, and 1986. Is it any wonder that accountants love it when Congress is in session?
And 2011 is no better because your 1099 statements will be different this year. I believe this is now being called ‘simplification.’
Until this year, your broker only reported to you and the IRS (on form 1099-B) that you sold stock and the total proceeds you received. This certainly helped you to remember to report the proceeds on your tax return. (As if you would have forgotten.) It was up to you to keep records of when you bought the stock, and what it cost you. Some of you may not have kept these records going back a year or 30.
Now, for 2011, the nice people at the IRS are really going out of their way for you. Your broker is now required to include your basis in that 1099-B statement, and whether you have a long-term or short-term profit or loss. The IRS feels that almost one-third of you may have misreported capital gains and losses over the years.
In addition, when you or your broker transfers to another broker, the receiving broker must be furnished with your securities information so that the new broker can give you your cost basis and sale history.
This is a phase-in rule. For 2011 the law coverage includes corporation stock, notes, bonds, debentures and other evidence of indebtedness, commodities, and commodity contracts or derivatives.
Although many mutual fund companies already provide this, they are required to do so as of 2012. This also includes the dividend reinvestment plans.
- If you have not done so already, call your broker and provide the basis of the securities they hold if that information is not on your monthly statement. If you don’t, the brokerage considers your cost to be -0-
- When you sell a security, check your statement to make sure your broker has recorded the correct information.
- When you sell a security, make sure the broker is selling the correct stock. If you bought stock at different times, your profit or loss is dependent on the purchase date. Depending upon your tax circumstances, give written instructions to your broker as to which stock to sell. If you don’t specify, the brokerage firm will use the first-in first-out (FIFO) method, or the ‘average cost basis’ if generally allowable.
It might be a good idea to meet with your tax preparer if any of your shares were acquired by gift, inheritance, etc or outside of your broker’s account, or if you have held your securities in a safe deposit box. Don’t wait until tax season.
Remember: there are just three types of accountants: those who can count and those who can’t.
Have a good week.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.