Form 8949 is used for reporting sales of capital assets. On Form 8949 for 2015, you separate your 2015 sales into short-term and long-term categories. Assets held for one year or less are in the short-term category and assets held for more than one year are in the long-term category. Th e totals from Form 8949 are entered on Schedule D (Form 1040). See the Example in 5.8, which includes fi lled-in samples of Form 8949 and Schedule D.
Th e computation of tax liability using the favorable long-term capital gain rates is not made directly on Schedule D, but on worksheets in the IRS instructions. Mutual-fund and REIT inves- tors may be able to apply the favorable rates on the “ Qualifi ed Dividends and Capital Gain Tax Worksheet” included in the Form 1040 or Form 1040A instructions, without having to fi le Form 8949 or Schedule D (32.8).
Held for a year or less. Details for sales of capital assets held for a year or less are reported in Part I of Form 8949 unless you are able to report them directly on Schedule D and you choose to do so. Th e total sales prices and total cost basis shown on Form 8949 for short-term transactions, along with any adjustments for such transactions, are transferred to Part I of Schedule D, where the net short-term gain or loss for the year is determined. A net short-term capital gain is subject to regular tax rates. A net short-term loss off sets a net long-term gain, if any, from Part II of Schedule D. A net short-term loss in excess of net long-term gain is deductible up to the $3,000 capital loss limit (5.4).
Held for more than a year. Details for sales of capital assets held for more than a year are reported in Part II of Form 8949, unless you are able to report them directly on Schedule D and you choose to do so. Th e total sales prices and total cost basis for all the long-term transactions shown on form 8949, along with any adjustments for such transactions, are transferred to Part II of Schedule D, where the net long-term gain or loss for the year is determined. A net long-term capital loss off sets a net short-term gain, if any, from Part I of Schedule D. If you have a net long-term capital gain on Part II and also a net short-term capital loss on Part I of Schedule D, the short-term loss off sets the net long-term gain. If the net short-term loss exceeds the net long-term gain, the excess short-term loss is deductible up to the $3,000 capital loss limit (5.4).
If you have a net long-term gain in excess of a net short-term capital loss (if any), the excess is called net capital gain and it is this amount to which the favorable capital gain rates may apply, as discussed below.
Law Alert
0%,15%, and 20% Rates Apply to Most Long-term Gains
If you have a net capital gain(net long-term gain over net short-term loss if any), the net gain may avoid tax under the 0% rate or be taxed at 15% or 20%, depending on your in- come. However, the 0%, 15%, and 20% rates do not apply to 28% rate gains from collectibles or 25% unrecaptured Section 1250 gains (real estate depreciation); see 5.3. Qualifi ed dividends (4.2) that are not tax free under the 0% rate are taxed at either 15% or 20%, depending on your income.
Th e eff ective tax rate on capial gains and divi- dends, as well as on other investment income,will increase by 3.8% for higher-income taxpayers subject to the additional Medicare tax on net investment income (28.3).
5.3 • Capital Gains Rates and Holding Periods
Reduced Rates on Net Capital Gain
Tax liability must be computed on IRS worksheets to benefi t from capital gain rates. Net capital gain (net long-term capital gain in excess of net short-term capital loss) is subject to maximum tax rates that are generally lower than the rates applied to ordinary income. Qualifi ed dividends (4.2) are subject to the same favorable rates as net capital gain.
If you have a net capital gain for 2015 that does not include a 28% rate gain or unrecaptured Section 1250 gain (see below), you should compute your 2015 regular tax liability on the “ Qualifi ed Dividends and Capital Gain Tax Worksheet” in the IRS instructions for Line 44 of Form 1040. On the Worksheet, you take into account the favorable capital gain rates, as applicable, and the regular tax rates on the rest of your taxable income. Th e Worksheet must be used to fi gure your regular tax liability instead of the regular IRS Tax Table (22.2) or Tax Computation Worksheet (22.3) in order to benefi t from the maximum capital gain rates. Th e tax liability from the Worksheet is entered on Line 44 of Form 1040.
If you have a net capital gain that includes either a net 28% rate gain or unrecaptured Section 1250 gain, you must compute your tax liability on the “ Schedule D Tax Worksheet” in the Schedule D instructions to benefi t from the maximum capital gain rates applicable to those assets. Th e tax liability from the Worksheet is entered on Line 44 of Form 1040.
On both the Qualifi ed Dividends and Capital Gain Tax Worksheet and the Schedule D Tax Worksheet, net capital gain eligible for the maximum capital gain rates is reduced by any gains that you elect to treat as investment income on Form 4952 to increase your itemized deduction for investment interest (15.10).
The 0%, 15%, and 20% rates. Qualifi ed dividends (4.1) and net capital gain (net long-term gains in excess of net short-term losses) are generally subject to the 0% or 15% capital gain rate on the Qualifi ed Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet.
Th e 20% rate may apply if your taxable income exceeds the threshold for the 39.6% tax bracket. Th is means that for 2015 returns, the 20% rate cannot apply unless your taxable income exceeds $413,200 if single, $439,000 if a head of household, $464,850 if married fi ling jointly, or $232,425 if married fi ling separately. Even if taxable income does exceed the threshold, your qualifi ed dividends and net capital gain are not necessarily taxed at the 20% rate. You may still be able to benefi t from the 0% and 15% rates, provided that most of your taxable income is qualifi ed dividends and net capital gain rather than ordinary income.
Note: Th e 0%, 15% and 20% rates do not apply to any portion of net capital gain that is 28%
rate gain (from collectibles and Section 1202 exclusion) or unrecaptured Section 1250 gain (from post-1986 real estate depreciation); these are subject, respectively, to maximum rates of 28% and 25% as discussed below. Also keep in mind that if your MAGI exceeds the threshold for the 3.8%
tax on net investment income (28.3), the eff ective rate on some or all of your gains (depending on MAGI) will be increased by 3.8%.
Can Your Gains/Dividends Avoid Tax Completely Under the 0% rate? You qualify for the 0% rate if your top tax bracket is 10% or 15%. Th is means that if your taxable income is within the 10% and 15% brackets, and none of your long-term capital gains are 28% rate gains or unrecaptured Section 1250 gains, then all of your gains and qualifi ed dividends are tax free under the 0% rate. On 2015 returns, the top of the 15% bracket is taxable income of $37,450, for single taxpayers and married persons fi ling separately, $50,200 for heads of household, and $74,900 for married persons fi ling jointly and qualifying widows/widowers. Th us, if your 2015 taxable income is no more than the applicable amount for your fi ling status, all of your net capital gain and qualifi ed dividends are tax free.
Perhaps surprisingly, individuals with a top bracket higher than 15% may also be able to benefi t from the 0% rate. Th e extent to which higher-bracket taxpayers can benefi t from the 0% rate de- pends on their taxable income, their fi ling status, which determines the top of their 15% bracket, and the amount of their qualifi ed dividends and net capital gain. On the IRS worksheets used to fi gure tax liability (the “Qualifi ed Dividends and Capital Gain Tax Worksheet,” or the “Schedule D Tax Worksheet,” as applicable), your taxable income is reduced by your qualifi ed dividends and net capital gain (other than 28% rate gain and unrecaptured Section 1250 gain). Th e resulting amount is treated as ordinary income and if it is less than the top of your 15% bracket, your quali- fi ed dividends and capital gains (other than 28% rate gain and unrecaptured Section 1250 gain) are tax free under the 0% rate to the extent that they “fi ll up” the rest of the 15% bracket.
Capital Gains Rates and Holding Periods • 5.3 For example, if you are single and for 2015 you have taxable income of $47,200, including
$2,000 of qualifi ed dividends and $12,000 of eligible net capital gain, your ordinary income for purposes of the worksheet computation is $33,200 ($47,200− $14,000), and since the top of the 15% bracket for single taxpayers is taxable income of $37,450, there is still $4,250 left within the 15% bracket ($37,450-$33,200). Th e 0% rate applies to $4,250 of your gains/dividends and the
$9,750 balance ($14,000 − $4,250) is taxed at 15%. Also see Example 2 below for how a married couple fi ling jointly with a top bracket exceeding 15% can benefi t from the 0% rate.
If the ordinary income is equal to or more than the top of your 15% bracket ($37,450, $50,200, or $74,900, as applicable), the 0% rate will not apply to any of your qualifi ed dividends and eligible gains; see Example 3 below.
Caution: Children subject to the kiddie tax. If your child is subject to the kiddie tax (24.2) and has net investment income exceeding $2,100 for 2015, the excess is treated as your own income and subject to your tax rate. If the excess includes net capital gains and qualifi ed dividends, your maximum capital gain rate will apply if it is higher than your child’s rate. Even if the 0% rate would apply to your child’s 2015 gains and dividends based on his or her taxable income, the 0% rate will not be available unless your rate is also 0% when you make the kiddie tax computation on Form 8615.
EXAMPLES
1. Arlen and Alice Able fi le a joint return for 2015 and report taxable income of $65,428.
This includes qualifi ed dividends of $3,298 and a long-term gain of $6,702 from the sale of stock. The 0% rate applies to the qualifi ed dividends and long-term gain to the extent that they fi t within the 15% bracket after taking into account the Ables’
“ordinary” income. On the Qualifi ed Dividends and Capital Gain Tax Worksheet, their
ordinary income is considered to be $55,428 ($65,428 taxable income – $10,000 ($3,298 qualifi ed dividends + $6,702 long-term gain). Since the top, or end-point, of the 15% bracket for 2015 joint returns is taxable income of $74,900, the 0% rate can apply to dividends/gains of up to $19,472 ($74,900– $55,428 ordinary income) and as $19,472 exceeds the Ables’ $10,000 of qualifi ed dividends and long-term gain, the entire $10,000 is tax free under the 0% rate.
2. Same facts as in Example 1, except Arlen and Alice have taxable income of $76,600.
On the Qualifi ed Dividends and Capital Gain Tax Worksheet, ordinary income is
$66,600 ($76,600 taxable income– $10,000 qualifi ed dividends and long-term gain).
The 0% rate applies to $8,300 of the dividends/gain ($74,900 top of the 15% bracket – $66,600 ordinary income). The $1,700 balance of dividends/gain ($10,000 – $8,300) is taxed at 15%.
3. Same facts as in Example 1, except Arlen and Alice’s taxable income is $86,000.
Since the ordinary income of $76,000 ($86,000 taxable income – $10,000 qualifi ed dividends and long-term gain) exceeds the $74,900 top of the 15% bracket, none of the dividends/gains are eligible for the 0% rate. The entire $10,000 is taxed at 15%.
28% rate gains from sales of collectibles and small business or empowerment zone business stock eligible for exclusion. Long-term gains on the sale of collectibles such as art, antiques, precious metals, gems, stamps, and coins are considered “28% rate gains.”
If you sell qualifi ed small business stock eligible for an exclusion ( Section 1202 exclusion (5.7)), the taxable portion of the gain is also treated as a 28% rate gain. Th e 28% rate transactions are reported fi rst in Part II (long-term capital gains and losses) of Form 8949 and then transferred to Schedule D, unless you are able to directly report them on Schedule D. If taking into account all your transactions you have both a net long-term capital gain for the year and a net capital gain (excess of net long-term gain over net short-term loss if there is one), you have to complete the
“ 28% Rate Gain Worksheet” in the Schedule D instructions. On the Worksheet, 28% rate gains are reduced by any long-term collectibles losses and net short-term capital loss for the current year, and any long-term capital loss carryover from the previous year.
A net 28% rate gain from the 28% Rate Gain Worksheet is entered on Line 18 of Schedule D and then on the “ Schedule D Tax Worksheet” in the Schedule D instructions. Th e Schedule D Tax Worksheet is used to fi gure the regular tax on all of your taxable income (not just on your net capital gain and qualifi ed dividends). Th e eff ect of the worksheet computation is to tax 28% rate gain at either the 28% rate or at the regular rates on ordinary income, whichever results in the lower tax.
Th e tax fi gured on the “Schedule D Tax Worksheet” is entered on Line 44 of Form 1040.