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Author: canuck104 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Capital Gains Tax Date: 2/11/2006 11:55 PM
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Looking for some help from all you tax strategists......

My wife and I no longer qualify for a Roth contribution, however, we still want to sock money away for retirement and/or miscellaneous near-term(0-5 years) expenses. I see us as having 2 options:

1. Traditional IRA, non-deductible contribution (means filing Form 8606 each year with our taxes).
Pro: Don't have to keep track of capital gains issues, tax-deferred growth.

Con: Accessibility of funds -however it appears that the non-deductible portion of the IRA (basis) can be withdrawn at any time without penalty....if I'm wrong, please correct me.

2. Standard brokerage account.
Pro: Accessibility of funds -can get the money whenever you want it.

Con: Have to keep track of when stock bought/sold, pay capital gains, etc. This sounds like a huge pain in the butt. I've spent quite a bit of time on the IRS website just trying to find the capital gains tax rate tables for short and long-term investments and the only publications I've found (including the instructions to Sched D.) are incomprehensible. I've also looked for some kind of plain-language guidance document to indicate how to treat stock purchases and sales (FIFO vs. LIFO), etc, but again, all I've found is gobbledegook. My whole experience looking at the IRS website makes me think the only way to invest is with tax-deferred accounts.

So, my questions are:
1. Can the basis of an IRA be withdrawn at any time (including years down the road) without penalty or tax?

2. When using a standard brokerage account, how do you keep track of all your transactions and compute your capital gains (FIFO? LIFO?). Is there a website (other than IRS.GOV!!) or book that can guide me.

3. Where can I find a functional tax-rate table as it applies to short term and long-term capital gains (and losses).

I'm sure these issues/questions have come up before and I've tried to find some old posts/articles on the Fool website but their new search engine is not that great (I hear their working on it), so if anyone can point me in the right direction, I'd appreciate it.

Thanks in advance!
canuck104





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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83836 of 121061
Subject: Re: Capital Gains Tax Date: 2/12/2006 12:37 AM
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Looking for some help from all you tax strategists......

My wife and I no longer qualify for a Roth contribution, however, we still want to sock money away for retirement and/or miscellaneous near-term(0-5 years) expenses. I see us as having 2 options:

1. Traditional IRA, non-deductible contribution (means filing Form 8606 each year with our taxes).
Pro: Don't have to keep track of capital gains issues, tax-deferred growth.

Con: Accessibility of funds -however it appears that the non-deductible portion of the IRA (basis) can be withdrawn at any time without penalty....if I'm wrong, please correct me.


Consider yourself corrected. All withdrawals from a traditional IRA with basis (that is, that contains non-deductible contributions) are part taxable, part non-taxable. See IRS Pub. 590, Individual Retirement Arrangements, www.irs.gov/pub/irs-pdf/p590.pdf.

2. Standard brokerage account.
Pro: Accessibility of funds -can get the money whenever you want it.

Con: Have to keep track of when stock bought/sold, pay capital gains, etc. This sounds like a huge pain in the butt. I've spent quite a bit of time on the IRS website just trying to find the capital gains tax rate tables for short and long-term investments and the only publications I've found (including the instructions to Sched D.) are incomprehensible. I've also looked for some kind of plain-language guidance document to indicate how to treat stock purchases and sales (FIFO vs. LIFO), etc, but again, all I've found is gobbledegook. My whole experience looking at the IRS website makes me think the only way to invest is with tax-deferred accounts.

So, my questions are:
1. Can the basis of an IRA be withdrawn at any time (including years down the road) without penalty or tax?


Answered above.

2. When using a standard brokerage account, how do you keep track of all your transactions and compute your capital gains (FIFO? LIFO?). Is there a website (other than IRS.GOV!!) or book that can guide me.

You keep copies of every purchase confirmation. If you don't specify otherwise at the time of the sale and receive confirmation from your broker, all sales are FIFO. Any "investing for dummies" type book, IRS Pub. 550, Investment Income and Expenses, www.irs.gov/pub/irs-pdf/p550.pdf, and the Fool's own Motley Fool Investment Guide should provide the information you're looking for. (If not the MFIG, then I think they've also published a Tax Guide).

3. Where can I find a functional tax-rate table as it applies to short term and long-term capital gains (and losses).

Easy. Short-term capital gains are taxed like ordinary income. It's no different from wages or interest. Long-term capital gains are taxed at 5% or 15% -- 5% if your taxable income falls within the 10% or 15% bracket, 15% if you're in a higher tax bracket. The 5% capital gains rate disappears in 2008. Capital gains rates change in 2009 to 10% and 20%.

I'm sure these issues/questions have come up before and I've tried to find some old posts/articles on the Fool website but their new search engine is not that great (I hear their working on it), so if anyone can point me in the right direction, I'd appreciate it.

Don't forget to check the links to the right to the Fool's tax center. It should have everything you need and more.

Ira

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Author: NaggingFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83837 of 121061
Subject: Re: Capital Gains Tax Date: 2/12/2006 12:46 AM
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You may find the fairmark website to be useful. www.fairmark.com

If you're looking at a 0-5 year timeline, cash or bonds make more sense than investment.

If you can't figure out how taxes apply to investments maybe managing your own investments is not for you.

- Megan


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Author: canuck104 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83838 of 121061
Subject: Re: Capital Gains Tax Date: 2/12/2006 12:47 AM
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Ira -you rock! The tax rate info was exactly what I was looking for (and the rest of you post was pretty good, too!) I should have posted here to begin with rather than try to find straight answers on the IRS website....I usually know better, too.....

Thanks again!





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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83883 of 121061
Subject: Re: Capital Gains Tax Date: 2/12/2006 10:04 PM
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irasmilo writes (in part):

Short-term capital gains are taxed like ordinary income. It's no different from wages or interest.

I reply:

A slight clarification that may be of value to some lurkers. I can think of one important difference between short-term capital gains and ordinary income. Capital losses can be applied to offset capital gains. Even long-term capital losses can offset short-term capital gains, if there are not enough long-term capital gains in the year to use up the long-term losses. In contrast, only $3,000 of capital losses can be used to offset other types of income.

Ira's statement is completely correct, as long as you realize he's talking about your net gains for the year. --Bob

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Author: freakyinvestor Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84006 of 121061
Subject: Re: Capital Gains Tax Date: 2/16/2006 12:28 PM
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Hi Bob,

In contrast, only $3,000 of capital losses can be used to offset other types of income.

Can someone clarify about the $3000?

My understanding is:

Say, Long-term (Capital Gains) - in a year = $4000
Say, Long-term (Capital Losses) - in a year = $1000
Its a profit of 3000$

Say, Short-term (Capital Gains) in a year = $7000
Say, Short-term (Capital Losses) in a year = $14000
Its a loss of 7000$

So, if we offset the long-term and short-term gains & losses, we have a loss of 4000$

With what other types of income, can we offset this 4000$ loss with.

I think that we can offset atmost 3000$ in a year and the other 1000$ gets carried to the next year. But, i don't really understand with what other types of income can we offset the overall loss against?

Thanks

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84011 of 121061
Subject: Re: Capital Gains Tax Date: 2/16/2006 12:46 PM
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So, if we offset the long-term and short-term gains & losses, we have a loss of 4000$

Right. And it happens to be a short-term loss in your example.

With what other types of income, can we offset this 4000$ loss with.

Non-capital gain income. IOW any other kind of income.

You use your capital losses in full against other capital gains. If there's a capital loss left over (as in your example) you use up to $3000 of that loss against any other kind of income. Anything in excess of $3000 is carried over to the following year.

--Peter

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Author: freakyinvestor Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84012 of 121061
Subject: Re: Capital Gains Tax Date: 2/16/2006 12:54 PM
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Ho Peter,

Non-capital gain income. IOW any other kind of income.

What do you mean Non-capital gain income?

Can you give some examples.

Whats IOW? I didn't get it.

Sorry, but i am still new to this world of taxes.

Regards

R

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84022 of 121061
Subject: Re: Capital Gains Tax Date: 2/16/2006 3:09 PM
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What do you mean Non-capital gain income?

Any income other than capital gains.

Can you give some examples.

Running down a 1040 from memory, there's: wages, interest, dividends, state tax refunds, pensions, IRA distributions, rents, partnerships, etc.

Whats IOW? I didn't get it.

That's an internet shorthand for In Other Words.

--Peter

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Author: chris319 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84130 of 121061
Subject: Re: Capital Gains Tax Date: 2/19/2006 7:38 PM
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When using a standard brokerage account, how do you keep track of all your transactions and compute your capital gains (FIFO? LIFO?).

This is the first year I have used a program called GainsKeeper and I am quite pleased with it. It keeps track of long-term and short-term capital gains as well as wash sales. It can even download transactions from your broker but I had better luck importing transactions manually (that may have been due to a brokerage issue). I was also able to import my transactions from GainsKeeper to CompleteTax (also highly recommended) and it gave me a nice, detailed (and lengthy) schedule D-1. Give it a look.

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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84146 of 121061
Subject: Re: Capital Gains Tax Date: 2/20/2006 8:31 AM
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When using a standard brokerage account, how do you keep track of all your transactions and compute your capital gains (FIFO? LIFO?).

FIFO is the default, and will be assumed by all parties (including the IRS) to be operative. The only way to override this is to give specific instructions to your broker to sell some specific shares (that are not the first ones bought), AND you must obtain written confirmation that it was those specified shares that were indeed sold. Normally, it's FIFO.

--SirTas

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84148 of 121061
Subject: Re: Capital Gains Tax Date: 2/20/2006 9:16 AM
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When using a standard brokerage account, how do you keep track of all your transactions and compute your capital gains (FIFO? LIFO?).

I've heard/read a lot of good things about Gainskeeper, but it costs $50 a year to subscribe, and, well, I'm cheap.

I do all my recordkeeping with a basis spreadsheet. One page for each stock, one line for each transaction, buy or sell. Basis adjustments are trivial. I almost always use FIFO because it's quite straightforward, and the difference between FIFO and identification by lot is small. The main thing is to keep records in a timely fashion. When I buy shares, I immediately go to the spreadsheet and enter the transaction. Likewise when I sell. And with each sale, I immediately generate a Sched D entry on a capital gains spreadsheet - when I've made my last sale for the year sometime in December, my Sched D is done. The only slightly tedious bit is working out the basis in a sale, but that rarely takes me more than a minute or two.

Lorenzo

(Ok, this works for me, and I typically have a couple of dozen sales a year. For a heavy trader, making several dozen sales a week - or even a day - something like Gainskeeper would probably be a bargain.)

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84150 of 121061
Subject: Re: Capital Gains Tax Date: 2/20/2006 11:26 AM
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It's pretty easy to set up one spreadsheet with columns similar to a Schedule D plus extra columns for a tracking "Symbol", number of shares, and whatever other information you desire, and populate it with formulas to
A. Compute profit/loss when both buy and sell info is completed.
B. Sort by Short Term and LOng Term from the transaction dates.
C. Filter out open transactions and closed items in prior years in order to print a set of Short term and long term Schedule D-1s to attach to your return.
D. Generate summing formulas on the D-1s to total each page.
E. Create an additional column and import current pricing to develop a daily Portfolio Value.
F. Add additional columns to develop whatever other information you want, such as Broker or Portfolio to filter to for grouping assets in any manner you want.


One spreadsheet keeps track of all your open positions, closed trades and can include stocks, bonds, options, collectables, real estate, whatever.

And its FREE and, per Alonzo, fun to set up for yourself. ed

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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84162 of 121061
Subject: Re: Capital Gains Tax Date: 2/20/2006 5:44 PM
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<The main thing is to keep records in a timely fashion. When I buy shares, I immediately go to the spreadsheet and enter the transaction. Likewise when I sell. And with each sale, I immediately generate a Sched D entry on a capital gains spreadsheet - when I've made my last sale for the year sometime in December, my Sched D is done.>


I do pretty much the same thing. The only difficulty is that I have a number of REITs. Sometime every January I have to look for each company's press release regarding the treatment of their dividends. With REITs you can have some ordinary dividends, qualified dividends, LTCGs, STCGs, Section 1250 gains and the old mess with your head one ROC.

You could leave it up to your brokerage firm to get it right on your 1099, but that has never once happened to me. I usually have to notify them that their information is either wrong or missing. The other wrinkle is that any ROC will cause you to have to refigure your CGs on any prior sales. The ROC reduces your dividend income, but will increase your CG by the same amount. Even if the brokerage firm eventually gets the dividend distributions right, they will not tackle the CG issue. That is not really surprising as they are only required to report the proceeds of your sales to the IRS. It remains the taxpayers responsibility to determine their cost basis.

In any case, the key to getting things right is to make your entries as soon as they occur. Unfortunately, many people never do that. They then compound that mistake by not addressing the issue until the clock is running out.


B

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