Académique Documents
Professionnel Documents
Culture Documents
Investments
McGraw-Hill Education
Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Investments Overview
strategy
Dividends
on stock
Example 7-1
Assume on January 1 of year 1 the Suttons invest the
$50,000 earmarked for the Park City vacation home in
General Electric (GE) bonds that mature in exactly five
years and the $50,000 designated for Lea's education
in GE bonds that mature in exactly 18 years. They will
purchase both bonds at face value, and both bonds
will pay 8 percent interest annually. How much interest
income will Nick and Rachel report from this
investment at the end of the first year?
Answer: $8,000. $4,000 of interest income ($50,000
.08) from each bond in the first year of the
investment.
Special rules apply for determining the timing and amount of interest
from bonds when there is a bond discount - the result of issuing
bonds for less than their maturity value. (bonds are issued at an
amount below the maturity value) or a bond premium the result of
issuing bonds for more than their maturity value. (bonds are issued
at an amount above the maturity value).
Corporate bonds, Treasury bonds and Treasury notes, - debt
instruments issued by the U.S. Treasury at face value, at a discount,
or at a premium, with a set interest rate and maturity date that pays
interest semiannually.
Treasury bonds have terms of 30 years., Treasury notes have
terms of 2, 5, or 10 years. Treasury bonds and Treasury notes pay a
stated rate of interest semiannually.
Corporate bonds may pay interest at a stated coupon rate or they
may not provide any periodic interest payments.
Zero-coupon bonds are Corporate bonds that do not pay periodic
6
interest and pay interest only at maturity..
premium.
Taxpayers are responsible for determining the
yearly amortization of bond premium.
The amount of the current year amortization
offsets a portion of the actual interest payments
that taxpayers must include in gross income.
The original tax basis of the bond includes the
premium and is reduced by any amortization of
bond premium over the life of the bond.
8
Example 7-2
Assume that Nick and Rachel decided to invest the $50,000
earmarked for the Park City vacation home in either:
(1) Series EE savings bonds that mature in exactly five years, (At
the end of the first year, the redemption value of the EE
savings bond would be $54,080)
(2) original issue AMD Corporation zero-coupon bonds that mature
in exactly five years. ( Taxpayers would receive a Form 1099-OID
from AMD reporting $4,080 of OID amortization for the year) or
(3) U.S. Treasury bonds that pay $46,250 at maturity in five years
trading in the secondary bond market with a stated annual interest
rate of 10 percent. (Taxpayers would receive two semiannual
interest payments of $2,312.50 from the Treasury bonds).
Further, assume that all bonds yield 8 percent annual before-tax
returns compounded semiannually.
Under the general rules, how much interest income from each bond
would Nick and Rachel report at the end of the first year?
9
ANSWER
$0 from the Series EE savings bonds, $4,080 from the AMD bonds, and
10
12
14
Exhibit 7-2
Timing of Interest Payments and Taxes
15
Qualified Dividends
18
Portfolio Income:
Capital Gains and Losses
Investments
Growth stocks
Land
Mutual funds
Other assets (precious metals, collectibles, etc.)
Portfolio Income:
Capital Gains and Losses
Investments
These
21
TAX BASIS
Portfolio Income:
Capital Gains and Losses
(2) by converting the capital gain into a long-term capital gain, the
gain is taxed at a preferential tax rate of 0%/15%/20% instead of
ordinary income tax rate
Portfolio Income:
Capital Gains and Losses
Capital gains
Capital Gains
Capital gains
Example 7-4
26
Answer 7-4
$3,000.
What
if: How much capital gain will the Suttons recognize if they
use the specific identification method of computing the basis in the
shares sold to minimize the taxable gain on the sale?
Answer:
EXHIBIT 7-4
Classification of Capital Gains by Maximum Applicable Tax Rates
*Lower rates will apply when the taxpayers ordinary rate is less than the rates reflected in this exhibit.
+This gain is taxed at 0 percent to the extent it would have been taxed at a rate of 15 percent or less if it were ordinary
income, taxed at 20 percent to the extent it would have been taxed at 39.6 percent as ordinary income, and taxed at 15
percent otherwise.
28
Portfolio Income:
Capital Gains and Losses
Capital
losses
Capital losses
Capital losses
Individuals
4: Separate all long-term capital gains and losses into the three
separate rate groups. Any long-term capital loss carried forward from the
previous year is placed in the 28 percent group. By definition the 25
percent group includes only gains.
Step 5: Net the gains and losses in the 0%/15%/20% group. If the result is
a net loss, move the net loss into the 28 percent group. If the result is a
net gain, leave the net gain in the 15 percent group and proceed to Step
9.
Step 6: If the Step 1 result is a short-term capital loss, move the loss into
the 28 percent rate group. Otherwise, ignore this step.
Step 7: Net the gains and losses in the 28 percent rate group to
determine if there is a net gain or loss in this group. Net gains in this group
are taxed at a maximum rate of 28 percent. Net losses move to the 25
percent group.
Step 8: Net the 25 percent gains with the net loss determined in Step 7.
Net gains are taxed at a maximum rate of 25 percent. Net losses move to
the 15 percent rate group.
Step 9: Net the 0%/15%/20% net gain from Step 5 with the net loss from
35
Step 8. This gain is taxed at a maximum 15 percent rate.
Capital
Intended
Wash Sale
A
41
Taxes in the Real World Seeking LongTerm Capital Gains and Diversification
Investors seeking long-term capital gains and diversification of their
investments frequently invest in so-called tax efficient mutual funds.
Like other mutual funds, tax efficient mutual funds invest in a portfolio
of stock and other securities; but, unlike other mutual funds, they
actively employ tax planning strategies to reduce current distributions
and to increase the likelihood that recognized investment gains will be
taxed at favorable long-term capital gains rates. One basic tax
planning strategy they employ is a simple buy and hold strategy
rather than frequently trading securities the way other mutual funds do.
Exchange traded funds, or ETFs, are also popular among traditional
investors in tax efficient mutual funds. ETFs are securities that typically
derive their value from an investment index such as the S&P 500.
Thus, like tax efficient mutual funds, they provide a measure of
investment diversification. However, unlike tax efficient mutual funds
whose actions determine when and how investment returns are taxed,
investors in ETFs have greater control over the timing and character of
investment returns from ETFs because ETFs are treated like
individual stocks for tax purposes.
46
Municipal Bonds
Offer
clienteles
47
Municipal bonds
Municipal
Implicit Tax
The
Taxpayers
Investment Expenses
Passive Investments
Cash invested
Share of undistributed income
Share of debt
Cash distributions
Prior year losses
At-Risk Limitation
Investments
Passive
loss limitation
Losses from limited partnerships, and from rental
activities, including rental real estate, are generally
considered passive losses. In addition, losses from any
other activity involving the conduct of a trade or business
in which the taxpayer does not materially participate are
also treated as passive losses. Material participation is
defined as regular, continuous, and substantial.
59
62
Exhibit 7-9
Income and Loss Categories
63
Consistent