It’s my annual Taxes from A to Z series! This time, it’s Tax Cuts and Jobs Act (TCJA) style. If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss under the new law, you won’t want to miss a single letter.
L is for Long-Term Gains Or Losses.
Long-term gains or losses are realized from sales (or other dispositions) of capital assets that you have owned for more than one year.
Short-term gains or losses are realized from sales (or other dispositions) of assets that you have owned for one year or less.
Basis is, at its most simple, the cost that you pay for assets. The actual cost is sometimes referred to as “cost basis” because you can make adjustments to basis over time. When it comes to stocks, your basis is generally equal to the original cost of the shares; if you participate in a DRIP or other reinvestment plan, your basis is your cost plus the cost of each subsequent purchase/reinvestment subject, of course, to other adjustments for splits and the like. Gains and losses aren’t determined from moment to moment but instead how much your cost basis has gone up or down from the time you acquired the asset to the disposition of the asset: those are called realized gains or losses.
At tax time, you’ll report your realized gains and losses on a Schedule D, and then transfer the results to the reconciliation page on your federal form 1040. You don’t file a Schedule D if you don’t have any realized gains or losses: even if the value of your shares went up and down significantly, if there’s no sale or disposition, there’s nothing to report.
If your realized gains exceed your realized losses, you have a capital gain that is taxable; the rate of tax will be dependent on whether those gains or losses are long-term or short-term.
Under the TCJA, there are three long-term capital gains brackets, the same as before: 0%, 15%, and 20%. However, before the TCJA, those brackets were tied to those for ordinary income; that is no longer the case. Now, brackets are based simply on filing status and income. For 2018, those numbers are:
Under the TCJA, short-term capital gains are still taxed at ordinary income tax rates.
(The net investment income tax (NIIT) rate may also apply to high-income individuals.)
If your realized losses exceed your realized gains, you have a capital loss for tax purposes. You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses in any tax year. The amount of your loss offsets your taxable income for the tax year. If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations. Some other limits and restrictions apply depending on the kind of assets: for example, you may not claim a capital loss for a personal residence.
Exceptions and special rules may apply to small businesses, retirement assets and other circumstances, as well as adjustments related to calls, puts, and straddles. There are also special rules for artwork, real estate, and other assets, especially as they relate to capital losses and carryforwards but those are beyond the scope of this piece.
For more on unrealized capital gains and losses, check out this prior post.
For more Taxes From A To ZTM 2019, check out the rest of the series:
- A is for Alimony
- B is for Bracket Creep
- C is for Credit For The Elderly Or The Disabled
- D is for Due Dates
- E is for Earned Income Tax Credit (EITC)
- F is for Fair Debt Collection Practices Act (FDCPA)
- G is for Gross Estate
- H is for Home Office Deduction
- I is for Innocent Spouse
- J is for Jackpot
- K is for Kiddie Tax