Report It The Right Way On Your Federal Income Tax Return

It is important to understand capital gains and losses when filling out your federal income tax return. The category of capital asset includes almost everything you have which you use for personal and investment reasons. Your home, household furnishings, stocks, and bonds in personal accounts are considered capital assets. Your capital gains and losses are calculated from the difference between the amount you paid originally for that asset and the amount you received when you sold it.

The IRS publishes important information to help you understand how your investments affect your tax return.

When you are figuring out what is classified as a capital asset, remember that purchases you made for personal, investment, and pleasure purposes are all included. Upon your resale of that asset, you can calculate your capital gain or loss. The original purchase amount is generally your basis from which you will derive your loss or gain.

Make sure to report all of your investment income on your tax return on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. Keep in mind that you can only deduct capital losses that come from investment property, not from personal property. They are classified in accordance with how long you actually owned it. They are either short-term or long-term, and that classification is based on one year's time. If you held it for one year or less, it is considered short-term. If you held it any longer than one year, it is long-term.

To have net capital gain, your long-term gains must be greater than your long-term losses. The difference between your loss and you gain in this case equals your net capital gain. Net capital gain is calculated separately from your regular income because the tax rates are lower, typically 15 percent. For individuals with lower incomes, the tax rate may be as low as 0%, but some specific types of net capital gains are taxed at 25% or 28%.

On the flip side, if you lose more than you gain, you can deduct those losses on your income tax return. This could reduce up to $3,000 in taxable wages (or $1,500 if you are married filing separately). If your net capital loss is greater than this amount, then you can treat it on your next year's tax return as if it happened in that year.

More details on reporting these parts of your income are available on the Schedule D instructions, Publication 550, Investment Income and Expenses or on Publication 17, Your Federal Income Tax.

Preparing Income Taxes - How Do I Report Information on a 1099-A?

The reporting of any cancellation of debt (COD) involves two different information documents; an IRS Form 1099-A, Acquisition or Abandonment of Secured Property and an IRS Form 1099-C, Cancellation of Debt. An IRS Form 1099-A is specifically provided to both tax authority and tax payer when a lender forecloses, repossesses, or has reason to suspect property is abandoned. Whether or not you receive either of these documents in a timely fashion, you must report cancellation of debt you have owed on your personal income tax. Acts of repossession, abandonment, or foreclosure are treated as a sale or exchange of property and the rules of gain or loss apply. Any income arising from the cancellation of a recourse debt is taxable whether or not property is returned or surrendered.

The IRS Form 1099-A is information form that includes the balance of outstanding debt, the fair market value of the property involved, a description of the property, and whether the debt is classified as recourse or non-recourse. Specifically, in Box 5, a "Yes/No" check box indicates whether or not the borrower is personally liable for repayment of the debt. The information in this single box on the form is critical because, if the box is marked "No", the debt is classified as non-recourse; that is, the borrower is not personally liable for the debt. In the case of a recourse debt however, the buyer is not only liable but, under cancellation of that debt, may have a gain, and thus additional taxable income, from the removal of the burden to repay the obligation. Where a recourse loan leads to foreclosure or repossession, the Form 1099-A provides critical information about additional taxes owed on that debt-generated income.

The sale information reported on a Form 1099-A is transferred to the IRS Form 1040 Schedule D, Capital Gains and Losses if the property was categorized as personal - use and there was a reported gain; losses are not reported. If the property was considered an investment, information is entered on Schedule D and ordinary gain/loss rules apply to the transaction. If the Form 1099-A describes business property, an IRS Form 4797, Sales of Business Property is completed and the results are, in turn, transferred to IRS Form 1040 Schedule C (business, sole proprietorship), E (rental), or F(farm).

The proper transfer of information from an IRS Form 1099-A to your income tax return is best left to an experienced tax preparer. You should expect to also include an IRS Form 1040 Schedule D with your tax return. Do NOT overlook COD events when filing your income tax return. For more information, visit the IRS website, IRS.gov.