How To Understand Capital Gains & Losses On Your Taxes and What To Do With Them After…..

capital gainsThere are two types of income, both required to be reported on your income tax return. Come “tax time” these are better known as ordinary income and capital gains. Ordinary income includes dividends and interest you receive. Capital gains are a bit more complicated and are better explained below. It is very important to understand the different types of income you are dealing with, especially when filing your taxes incorrectly could cost you part of your refund or trigger an audit.

Capital gains are what tax law calls “profit” you receive when you sell a capital asset. Capital assets are property such as stocks, bonds, mutual fund shares, non-primary real estate, and collectibles. There is also a difference between short-term and long-term capital gains, determined by how long an asset is held before selling. Short-term gains come from the sale of property owned one year or less, whereas and long-term gains come from the sale of property held more than one year. To complicate things even more, these gains are taxed differently as well. Short-term gains are taxed at the maximum tax rate, as high as 38.5%, however, most long-term gains are taxed at either 0% or 15%. These tax rates may also change by calendar year.

Capital losses are realized when the asset is sold. Capital losses are divided by the calendar year into short and long-term losses. You may deduct capital losses on the sale of investment property, but not on the sale of personal-use property. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. If your total net capital loss is more than the limit you can deduct, you can carry over these unused losses to next year’s tax return. You will treat these carryover losses as if they occurred that year.

“This area of tax reporting can be confusing and there are special rules that you need to follow in order to make sure that you report these transactions correctly and pay the appropriate taxes” addresses Jim Blankenship of Blankenship Financial Planning in his latest article on Capital Gains and Losses on Your Tax Return.

Use the following forms to assist when filing on your own;
Form 8949 – Sales and Other Dispositions of Capital Assets (this form will help you calculate your capital gains and losses)
Schedule D – Capital Gains and Losses Form (take the subtotals from the form above and apply to this form for totals)

After your taxes are calculated and you know how much you are receiving back from the government, think about what you are doing with this sum of money. Here are some tips and statistics from tax and financial planning experts.

A new survey done this year between January 15th and January 22, 2013 showed that 56% of Americans plan to save their tax refunds. Half of these savers plan to put their money toward their emergency fund and the other half plan to save toward a big purchase, put it toward a college fund, or use it for their retirement. What do you plan to do with your tax returns? My husband and I have a new roof to furnish and medical bills to pay off. Unfortunately, there will be little fun with our tax refund, although, we did get back more than what we expected. Numbers show that 44% of Americans expect to get less than $500 from their tax return and only 8% expect to receive over $3,000.

The other 44% plan to spend their refund check for a vacation, new clothes, a major purchase such as a new car or big appliance, and “everyday expenses”. The most revealing statistic surveys found was 69% of all Americans don’t factor their tax refund at all into their personal budgets. Experts say this is a big mistake. “Tax season is a good opportunity for people to plan ahead for their future goals and financial health” lectures Mickey Konson, managing vice president for retail banking at Capital One Bank.

Most Americans view their tax refunds as “free money”, much like an inheritance or a bonus at work. If instead they viewed this money as a type of financial transaction the cash would be used more carefully. This money is a return of one’s overpayment to the government, not a gift. View this money as you would your own paycheck; re-evaluate the way you look at it. Hopefully this will result in a wiser use of the funds.

Bankrate.com finds that approximately one-fifth (or 19%) of those who expect or have received a refund say they adjusted or plan to adjust their withholding to receive a smaller refund next year. “It’s good to see people adjusting their withholdings, unfortunately, it’s probably because they need the money now to meet their day-to-day living needs” says Kay Bell, author of “The Truth About Paying Fewer Taxes”. “Hopefully once the economy picks up, they will still be able to do this and take the little bit extra and put it into savings throughout the year.”

In reading this article we hope that you double-check your Capital Gains and Losses to make sure they are calculated correctly. With all stipulations involved, think twice about how you will spend your 2012 Income Tax Refund. Saving or putting it toward retirement may be the preferred way to go. Spending it on something you probably don’t need might give a small amount of immediate satisfaction, but not nearly the amount of satisfaction that planning for your future will provide.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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