Taxation of Investment Vehicles Flashcards
Taxation of T Bills (<1 yr), Notes (2-10yrs) and Bonds (10-30 yrs)
Exempt from state and local taxes
Taxation of Agency Bonds issued by federal agencies authorized by Congress
Exempt from state and local taxation other than Fannie Mae and Freddie Mac, which will be subject to both federal and state taxes.
Taxation of municipal bonds
Interest is tax-free if residing in the same state, subject to federal income tax if there’s capital gain/loss on the sale; OID is tax -exempt (considered form of interest income and accreted using constant yield method), but market-discount (difference between purchase price on secondary market and adjusted basis) is not as it is considered a capital gain
Interest from Private activity municipal bonds are subject to tax under AMT methodology
Taxation of Zero Coupon
Municipal bond interest is tax exempt; treasury bonds are subject to “phantom income” which is the annual appreciation in value or undistributed interest and is considered income that is reinvested and compounded but not actually received and is subject to Federal tax
Taxation of TIPS (Treasury Inflation-Protection Securities)
Federal taxes on interest paid annually and capital gains tax on growth (adjusted 2x a year)
Basis determination methods for stocks and mutual funds
- FIFO- works well if first shares were the most expensive (default method)
- Average cost
- Specific share identification
Capital Gains and Losses
ST @ regular income and LT capped at 20%
Liquidations
Difference between liquidated and adjusted basis
Stock splits/dividends
Not taxable events but should keep record for cost basis; some stock dividends are subject to taxes but are rarely declared:
stock splits are a type of stock dividend (distributions by a corporation to its shareholders of the corporation’s own stock)
Warrants and rights
If exercised, the basis will begin on the day that warrant or right was exercised- similar to options for tax purposes; If the FMV of a non-taxable stock right received is equal to or greater than 15% of the FMV of the stock, the basis of the stock owned before the distribution must be allocated between the stock and the stock rights.
Kinds of capital gains in mutual funds
- Personal: transactions with MF shares- will receive 1099-B
- Distributed: incurred by portfolio managers from trades within portfolio and paid as ST/LT distributed gains, 1099-DIV
US Savings bonds
- Non-marketable securities, registered, interest is exempt from state and local income tax, can defer federal income tax. Series EE/HH/I
Taxation of annuity
- Determine expected return multiple (yrs the annuity is expected to continue)
- Determine expected return: multiply above by the annual payment
- Determine exclusion ratio: divide cost by expected return
- Determine current year’s exclusion: Multiply exclusion ratio by amount received during the year
Remaining portion of annuity is taxed
Limited Partnerships
Passes profits of partners who declares profits on personal returns. Taxability depends on operating results
Dividend distributions in excess of one’s basis in a stock are classified as
capital gains (Distributions to shareholders are taxable only to the extent they are made from either the corporation’s current earnings and profits or accumulated earnings and profits)
