Basis And The Tax Consequences Of The Dispositions Of Property: Taxation Of Investment Transactions Flashcards
(29 cards)
Exhibit 21 summary of taxation of investment transactions
When selling stock what are the basis options when you sell it?
First in first out (default)
Specific identification
If a corporate bond is purchased at a premium taxpayer can do what with the basis
Taxpayer will reduce the basis by the amount of amortization taken, if elected
How is the premium on municipal bonds treated?
Must be amortized and no deduction
What are original issue discount bonds (OID)
Typically applies to zero coupon or deep discount bonds
Interest is usually accrued and includable in income, despite an absence of cash flow
Accrued interest reported each year by the taxpayer is added to the basis
Is there a recognition of income when nonqualified stock options or incentive stock options are granted
No
Nonqualified stock options (NQSO)
When does an individual recognize income when a nonqualified stock option is granted?
If the option is traded on an exchange and not subject to a substantial risk of forfeiture
Nonqualified stock options (NQSO)
An individual is taxed on what when the option is exercised
The bargain element, is considered compensation income and taxed at ordinary income tax rates and will be included in the employees W-2 subject to FICA and FUTA (unemployment) taxes
Nonqualified stock options (NQSO)
What is the bargain element and how is it figured?
It is the difference between the FMV stock on the date of exercise and the option price
Nonqualified stock options (NQSO)
What is the basis and when does the holding period begin
Basis is the fair market value at the date of exercise
Holding. Begins on the day of exercise which determines if the gain is a long-term or short term.
John’s employer grants him an (NQSO) with an exercise price of $25. John exercises the NQSO when the market value is $40. What is the bargain element?
John sells the stock two years later for $60. What is this long-term gain?
The bargain element is $40 - $25 = $15 included in W-2 income and is subject to FICA and FUTA
His long-term capital gain is $60 - $40 = $20
Incentive stock options (ISO)
How is income and taxes treated when the option is granted and exercised
No income is recognized when the options granted
No regular taxes due when the option is exercised , taxes due when the stock is subsequently sold
Incentive stock options (ISO)
Taxes due when the stock is sold, how is it treated for tax purposes?
If the taxpayer does not dispose of stock within two years after the option grant and holds the stock for more than one year after exercise any gain over the exercise price will be capital gain
Taxpayer sells the stock within one year after the exercise date the gain is considered compensation income and reported on the W-2 and tax ordinary income tax rates subject to FICA and FUTA
Incentive stock options
Does the alternative minimum tax apply?
Yes
Samantha‘s employer grant her and ISO on January 1 year one with an exercise price of $25. Exercises the ISO on January 2 year 2 when the market price is $40 what is the income of this the AMT adjustment?
What if Samantha sells the stock two years later for $60 what is her long-term capital gains for regular income tax and what is her AMT basis and AMT gain?
No ordinary income recognition is triggered $15 will be an AMT adjustment $40 - $25 = $15
Her basis is $25 and she has a $35 long-term capital gain for regular income tax . $60 - $25 = $35
Her AMT basis is $40 and she will have an AMT gain of $20
$60 - $40 = $20
Capital gains distributions from a mutual fund or tax at either long-term or short term capital gain rates?
Long-term capital gains rates
A shareholder of mutual funds has the following options and determining basis of the shares sold
First in first out
Average cost per share
Specific identification
The sale of personal use property at a gain will generally be what? And a loss on a sale of personal use property is non-deductible or deductible?
Gain will be a capital gain
A loss is nondeductible
Section 1244 stock
Losses on section 1244 stock treated how?
Gains from the sale of section 1244 stock treated how ?
Losses are ordinary losses up to $50,000 per year for single taxpayers and up to $100,000 for married taxpayers filing jointly any excess losses beyond the 50 or $100,000 in the year are capital losses
Gain from the sale of section 1244 stock or capital gains
What is the surtax tax on net investment income and what are the thresholds?
3.8% with modified adjusted gross income (MAGI) exceeding the following thresholds
The tax of 3.8% is of the lesser of net investment income or the excess of MAGI over the threshold amount that is atributable to investment income
Is the surtax on net investment income of 3.8% on ordinary or capital gain?
Yes
A single client has MAGI of $210,000, including $15,000 of net investment income. How much is subject to the 3.8% tax?
Single $200,000 threshold
Only $10,000 because that is the lesser of the amount that exceeds the threshold or the investment income is subject to the 3.8%
How is the 3.8% surtax on net investment income treated for estates and Trust?
The tax is 3.8% of the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins
Does the surtax of 3.8% apply to the portion of gain above the exclusion of a personal residence?
Yes, if the taxpayers MAGI exceeds the applicable threshold
