Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 19, 1990 TAG: 9003162932
SECTION: BUSINESS PAGE: B6 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
On some of the dividend statements I receive from the companies there is ordinary dividend and capital gains distribution broken out. On Schedule B, I am told to subtract out the capital gains part of the dividend; but this amount is put back in on Line 14 of my 1040.
Why is it subtracted out and then put back in for income?
A: Prior to 1987 there was a tax break for capital gains distributions. Individuals could deduct 60 percent of net capital gains from their gross income. However, the Tax Reform Act of 1986 repealed this capital gain deduction for individuals effective with the 1987 tax year.
The capital gains distribution is stated separately on your dividend statement and your Form 1040 because the capital gains structure was retained in the Internal Revenue Code. Only the deduction was repealed by the Tax Reform Act of 1986. Capital gains and losses must still be combined, and in the case of a loss only $3,000 is deductible in any one year. The remainder must be carried over to future years. The retention of this structure will also make it easier to reinstate a tax break for capital gains should Congress decide to do so in the future.
\ Vacation's loss
Q: In 1983 my wife and I bought a week of a time share condominium. (It's not a lease, but ownership of 1/50th of the building. The maintenance fee included property tax, insurance and regular maintenance costs.) We sold it in 1989 for considerably less than we paid.
Schedule D for Capital Gains and Losses is extremely complex, and the instructions are no help.
We financed the time share and sold it for an amount to pay off the loan and related expenses. The check sent to us also included repayment of the 1989 maintenance fee since the new owners would use the week, not us.
I have always completed my own tax forms, but this complication has left me scratching my head.
A: Schedule D is used to compute gains and losses from the sale of capital assets. In general, the gain or loss for tax purposes is the difference between the sales price and the taxpayer's basis in the property.
The taxpayer's basis in the property is the sum of the following less any depreciation taken on the property:
1. Original purchase price;
2. Commissions paid at the time of purchase;
3. Improvements to the property; and 4. Expenses of the sale such as broker's fees, commissions and transfer taxes.
All capital gains and losses are combined on Schedule D. A net gain is reported as income on Form 1040. A net loss is deductible on Form 1040 only up to $3,000. If your loss exceeds $3,000, the remainder must be carried over to future years.
In this particular situation, none of the loss is deductible for income tax purposes. Any loss recognized on the sale or exchange of a dwelling unit used exclusively for personal purposes is not deductible to an individual. This includes a principal residence or a vacation home used for personal purposes as well as a time-share condominium. However, a gain on a time share or vacation home used for personal purposes could be included in taxable income. A gain on a principal residence is also taxable unless it is reinvested within 24 months after you sell your home or you take the one-time exclusion for people age 55 or older.
Roll over, simply
Q: I changed from one tax sheltered annuity company to another in 1989 and received Form 1099-R reporting the distribution. How do I show this and what form do I use on my tax return?
A: From the information you attached, I understand that you have received a distribution from a life insurance company, and you have chosen to roll over this money into your fixed annuity account at a new life insurance company.
You should report the total distribution on line 17a of your federal Form 1040. Assuming you deposited the total amount you received within 60 days of the date of distribution, you should report $0.00 on line 17b for the total taxable amount. You are not required to file any additional forms, nor are you required to inform the Internal Revenue Service of the change in life insurance companies.
If you have additional questions, refer to the instructions to the above-referenced lines in your 1040 packet or consult your tax adviser.
Tax credit math
Q: On page 2, part IV of the Virginia Income Tax Form pertaining to credits, it states that you cannot take the credit for 62 and over if you take the pension credit, but you can take the credit that benefits you most.
When I called the county tax office about this, I was informed that we still couldn't take the above credit if our gross income from the federal tax form was more than $17,389. It is more but, if divided, it is less. The way I understand the instructions, it can be divided.
My husband's pension is more than $2,000 but less than $30,000. It is to our advantage not to take this credit.
Most of our income came from interest on CDs. All are owned jointly except for one which is in my name only.
We are 79 and 80 years old. Will you please tell us the best way to handle this at our advantage?
A: Virginia's Tax Reform Act changed the qualifications for claiming the credit for taxpayers age 62 and over. The biggest change that may prohibit you from claiming this credit is that taxpayers with $2,000 or more of qualified retirement income included in federal adjusted gross income no longer qualify for this credit. Qualified retirement income does not include Social Security Act or Railroad Retirement Act benefits.
As mentioned in the question, Virginia has instead provided for a retirement income subtraction. You may be entitled to a subtraction of all or part of your retirement income if you were age 55 or older on Jan. 1, 1990, and have less than $40,001 of qualified retirement income.
The first $16,000 of retirement income is fully exempt each year; when retirement income exceeds $16,000 the subtraction amount is reduced. When married, you both have qualified retirement income, and you filed a joint federal return, you need to use Filing Status 4, which is married filing separately, to receive the greatest amount of subtraction allowable. In this case each subtraction will be computed separately.
As stated in the question, you are not entitled to claim both the retirement income subtraction and the credit for age 62 and over. You are also not entitled to the credit for age 62 and over if you take a subtraction on line 36 of Form 760 for the amount of disability income used to compute the federal disability income tax credit.
Another restriction on taking the credit for taxpayers age 62 and over is that your benefits for Social Security or Railroad Retirement Act, including Railroad Supplemental Annuities, do not exceed the credit base amounts, for your age, on line 47, Part IV, of the Virginia Form 760.
The last restriction is that your federal adjusted gross income must not exceed $17,389. When married, the $17,389 threshold and the $2,000 retirement income threshold applies separately to each spouse. The retirement income must be attributable to you and cannot be split if it is attributable to your spouse.
Based on the information provided in your question, you will not be able to take the credit for taxpayers age 62 and over because your qualified retirement income exceeds $2,000. It appears that you also will not qualify as your federal adjusted gross income exceeds $17,389. The retirement income cannot be split to lower you below either threshold. You should, however, be allowed to utilize the Virginia retirement income subtraction.
by CNB