Taxes Flashcards
Earned Income
- income earned from salaries/wages
- bonuses/royalty’s
- SS and retirement benefits still taxed as earned
Earned Income max tax rate
37%, progressive rate
Portfolio Income
- divided into investment income and capital gains
Portfolio Income/ Investment Income
- dividends received from stock
- interest received from debt investments
- expenses associated with the income are only deductible to the extent of inv income
Max Tax Rate on dividends received from corporate stock
15%
- if an individual is in a higher tax bracket, 20%
Portfolio Income/ Capital Gain
- gains realized from sales of asset
- capital losses are only deductible to the extent of the capital gain
Max Net Capital Loss Deduction Per Year
$3,000
Net Short Term Capital Gains Tax Rate
- regular bracket
- 37%
Net Long Term Capital Gains Tax Rate
- longer you hold, lower the tax rate
- 15% or 20% if high income
- all capital losses may be deducted
Passive Income
- income received from REITs and limited partnership interests
- expenses are ONLY deductible against passive income
Progressive Tax
Tax rate increases progressively as one’s income increases
Regressive Tax
- any tax that is based on a flat tax rate
Tax dividends received from common stock and dividends are taxable when
the year they are received
Cost Basis
Price paid for stock including commissions or markups
any capital gain or loss is deducted from cost basis
Form 1099B
- Sales proceeds when a position is sold
- cost basis
- whether gain or loss is long term or short term
- taxes witheld by broker dealer on capital gains
Cost basis ___ for stock splits
adjusts for stock splits
Cost basis ___ for stock dividends
adjusts for stock dividends, NOT CASH DIVIDENDS!
Cost basis for stock splits/ dividends is or is not taxable in that year as income
is not taxable as income in that year
Interest received on us government or us foreign bonds is
taxable in the year received
Cost basis of a bond
purchase price plus any commission paid
Accretion
every year the portion of discount that has been earned is included as taxable interest income and the bonds cost basis is increased by that amount
Ammortization
every year the portion of the premium paid is written off against taxable interest income and the bonds cost basis is reduced
Trading of market bonds
- option of amortizing premium
- option of accreting discount
TIPS upward principal
if principal amount of bond is adjusted upwards for inflation, the adjusted amount is treated as taxable income in the year of adjustment
TIPs downward principal
if principal amount is adjusted downward for deflation, the adjusted amount is treated as deductible expense in the year of the adjustment
Expenses with holding municipal bonds
are not deductible
Municipal yields are ___ than corporate yields
lower
Equivalent taxable yield
= tax free yield / 100% - tax bracket
Equivalent tax free yield
= taxable yield * (100% - tax bracket)
For new issue municipal discount
discount must be accreted on a straight line basis over the life of the bond
- redemption at par no capital gain or loss
Annual accretion amount on new issue muncipal bonds issued at discount is
non taxable municipal interest income
For new issue municipal bonds issued at premium
discount must be amortized on a straight line basis over the life of the bond
Annual amortization amount for municipal bonds issued at a premium
reduces non taxable interest income yearly and reduces the bonds cost basis for tax purposes
if a customer has a loss on a position
- must sell the security to deduct capital loss in that tax year
wash sale
sale at a loss with repurchase the security 30 days later
loss deduction is disallowed
wait 31 days
The equivalent positions that will cause the sale of a security at a loss to be disallowed under the “wash rule” rule are:
- buy a security convertible into that stock within 30 days
- buy a call option, right, or warrant within 30 days
- sell a deep in the money put on that security within 30 days
New Cost Basis of A wash sale
New Cost + Disallowed Loss
NewSales Proceeds of a repurchase sale
New Sales Amount - Disallowed Loss
