Taxation of Investment Vehicles Flashcards
What does lower turnover mean re: taxes?
lower turnover usually means lower realized gains, which means lower taxes
What is one strategy you can use to offset gains and reduce tax cost?
offset gains by realizing or harvesting losses - tax loss harvesting
Wash sale rule works how
you can’t claim a loss when the same investment was purchased 30 days before or after the sale date
Cant buy the security for 31 days
Qualified Dividends Tax Rate
20%
Who pays qualified dividends?
corporations - dividends paid by some organizations may not be qualified
If a dividend is not qualified, is the tax rate higher or lower?
Higher
US Debt interest is not taxed by whom?
States
Municipal bonds are not taxed by whom?
Federal government
What are the potential taxes that could apply to a municipal bond?
State tax could apply unless the state excludes them
Alternative minimum tax
Qualified Dividend stock has to be held how long
60 days
Non-qualified dividends taxed how
ordinary income
Are dividends subject to taxes if they are reinvested to purchase more shares?
Yes, even when dividends are not paid out in cash, they are taxed as ordinary income.
Dividend distributions in excess of current and accumulated earnings and profits are treated as?
non-taxable recovery of capital - taxed as capital gains
Stock starting basis
what a person initially pays for the purchase of the stock, plus any cost of purchase such as commissions
Stepped up basis
If the person received the stock as an inheritance, the starting basis is the value of the stock on the date the original owner died
If stock is given as a gift, the starting basis is the lesser of either:
- the starting basis for the person who gifted the stock,
-the market value of the stock on the date of the gift.
How could someone realize a gain on stock given as gift?
Ron paid $10,000 for the stock, and the fair market value (FMV) of the stock is $20,000 at the date of the gift. If Jennifer sells the stock for $20,000 she will use Ron’s starting basis of $10,000 to report the capital gain
If gifted stock has a FMV of less than the original basis
- if you sell it for a gain you use the original basis
- if you sell it for a loss you use the FMV
What stock valuation is appropriate when the first shares were the most expensive?
FIFO
You buy:
200 shares on January 3, 2006 at $1.50/share
300 shares on September 5, 2009 at $10.50/share
200 shares on April 20, 2021 at $9.50/share
On September 15, 2021 she sold 400 shares at $10/share.
What is cost basis according to the FIFO method?
200 shares at $1.50
200 shares at $10.50
gain/loss for this sale was:
200 shares ($10 - $1.50) = $1,700
200 shares ($10 - $10.50) =
-$100
Net gain for the sale = $1,600.
Remember to consider how long she held the shares
If original shares were purchased at the lowest price, would you use FIFO?
No - If an investment’s value rises over time, then the shares purchased the earliest cost less and would produce the greatest taxable gain.
Can you change the taxation method for stocks once you start using a particular method?
Once an investor decides on a method, they must stick to that method for holdings of that security
You would only use average cost taxation method with what securities? stocks or mutual funds?
mutual funds
How to determine average cost of mutual funds for taxation?
the total cost of all shares purchased including any invested dividends is divided by the total number of shares held.
Average cost method for mutual fund taxation is most appropriate when mutual fund original cost was high or low?
low
Specific share method
specific shares are used to apply against the shares sold
Before selling shares, the shareholder must instruct the broker or fund company regarding which shares are to be sold. These instructions must be given at the time of sale or transfer, not later
In specific share method which shares should you select?
The shares that create the largest capital loss or smallest capital gain
Holding period for long term gains begins when
day after the acquisition date - then date you sell
Long term capital gains max tax rate
20%
Three long term gains brackets
0%
15%
20%
What is tax rate for short term gains?
Ordinary income
What is max rate for short term gains?
37%
How are losses matched?
short term losses go against short term gains
long-term losses go against long term gains
Diff between taxation on individual stock vs stock fund
Stock fund distributes capital gains during holding period. Forces you to pay the tax expense on the gains even if they were reinvested. With individual stock you don’t pay until you sell.
General rule for complete liquidations
shareholders are deemed to have sold their stock to the corporation in exchange for money or other property. If the stock is a capital asset, the shareholder recognizes capital gain or loss equal to the difference between:
the money plus the fair market value (FMV) of other property distributed to the shareholder, and
the adjusted basis of the shareholder’s stock.
Stock splits are a type of what
Dividend
