Capital Gains and Losses - Schedule D
Why almost everyone has to be concerned about capital gains taxes
Why many people needlessly pay capital gains taxes
Taxes on mutual funds
How to greatly simplify your taxes involving capital gains
Capital gains on home sales
Why almost everyone has to be concerned about capital gains taxes
If you buy a stock, bond or mutual fund outside of a retirement account, you'll have to calculate capital gains taxes
An exception is money market mutual funds which almost never have capital gains transactions
If you sell a home, you'll also have to calculate capital gains taxes
Why many people needlessly pay capital gains taxes
Capital gain subject to tax equals sale proceeds minus cost basis
A higher cost basis reduces your taxable gain
Many people forget to increase their cost basis
If you add a new room to your home, increase the cost basis of the home by the cost of the addition
If you reinvest dividends paid by your mutual fund, those dividends increase your cost basis and reduce your gain when you subsequently sell shares
Taxes on mutual funds
This only applies to those funds held outside of retirement accounts
This doesn't apply to money market mutual funds since such funds almost always maintain a stable share price
Three ways to determine your cost basis
FIFO (first-in-first-out) cost
- IRS default method
- Generally gives highest tax if shares have risen in value
Specific shares cost
- Should send letter to fund telling fund which shares to sell
- Generally gives lowest tax if you sell the most expensive shares
Average cost
- Mutual funds often automatically provide you with average cost information at the end of the year
- Generally gives a tax midway between the FIFO and specific shares method
How to greatly simplify your taxes involving capital gains
There are no capital gains taxes on transactions which occur inside of retirement accounts
All money pulled out of a retirement account is taxed at higher ordinary income tax rates
Do your trading inside your retirement accounts
Try to avoid trading securities which are not sheltered inside of retirement accounts
Capital gains on home sales
All sales must be reported on Form 2119
Income from Form 2119 flows into Schedule D
If you trade up to a larger home, you usually won't owe any taxes
You defer the tax on the gain by reducing the cost basis of your new home
If you're over 55 and sell your home, you may be eligible for a once-in-a-lifetime capital gains exclusion of up to $125,000 in gains