Capital Gains and Losses - Schedule D

Capital Gains and Losses - Schedule D

Why almost everyone has to be concerned about capital gains taxes

Why many people needlessly pay capital gains taxes

Taxes on mutual funds

How to greatly simplify your taxes involving capital gains

Capital gains on home sales

Why almost everyone has to be concerned about capital gains taxes

If you buy a stock, bond or mutual fund outside of a retirement account, you'll have to calculate capital gains taxes

An exception is money market mutual funds which almost never have capital gains transactions

If you sell a home, you'll also have to calculate capital gains taxes

Why many people needlessly pay capital gains taxes

Capital gain subject to tax equals sale proceeds minus cost basis

A higher cost basis reduces your taxable gain

Many people forget to increase their cost basis

If you add a new room to your home, increase the cost basis of the home by the cost of the addition

If you reinvest dividends paid by your mutual fund, those dividends increase your cost basis and reduce your gain when you subsequently sell shares

Taxes on mutual funds

This only applies to those funds held outside of retirement accounts

This doesn't apply to money market mutual funds since such funds almost always maintain a stable share price

Three ways to determine your cost basis

FIFO (first-in-first-out) cost

• IRS default method
• Generally gives highest tax if shares have risen in value

Specific shares cost

• Should send letter to fund telling fund which shares to sell
• Generally gives lowest tax if you sell the most expensive shares

Average cost

• Mutual funds often automatically provide you with average cost information at the end of the year
• Generally gives a tax midway between the FIFO and specific shares method

How to greatly simplify your taxes involving capital gains

There are no capital gains taxes on transactions which occur inside of retirement accounts

All money pulled out of a retirement account is taxed at higher ordinary income tax rates

Do your trading inside your retirement accounts

Try to avoid trading securities which are not sheltered inside of retirement accounts

Capital gains on home sales

All sales must be reported on Form 2119

Income from Form 2119 flows into Schedule D

If you trade up to a larger home, you usually won't owe any taxes

You defer the tax on the gain by reducing the cost basis of your new home

If you're over 55 and sell your home, you may be eligible for a once-in-a-lifetime capital gains exclusion of up to $125,000 in gains