Part One of Schedule D lists all short-term capital gains or losses for the year. The details that must be provided are a description of the property, the date the property was acquired, the date the property was sold, the sales price, and the cost or other basis of the property. The cost or basis is subtracted from the sales price to arrive at the amount of gain or loss for each property, and the short-term gains and losses are then netted together.
Part Two of Schedule D compiles all long-term capital gains and losses for the tax year. The same details are required as for the short-term gains and losses. The gain or loss for each long-term property is computed, and the totals for long-term gains and losses is reported.
In Part Three of the schedule, the short-term and long-term amounts are added together. The amounts are carried over to the individual’s income tax return.
The benefit of being able to classify a gain as long-term is that long-term capital gains are normally taxed at rates lower than those used for ordinary income. The highest tax rate for long-term capital gains is 15% for taxpayers in a tax bracket greater than 15%, and usually 5% for taxpayers in a tax bracket of 15% or less.
After reporting your sales of capital property on Schedule D, you then complete the Qualified Dividends and Capital Gains Tax Worksheet included in the instructions for Form 1040. This is where your tax liability is calculated taking into consideration the favorable capital gains tax rates. If the taxpayer has either un-recaptured Section 1250 gain or 28% gain, he or she would complete the Schedule D Tax Worksheet in the instructions for Schedule D to determine his or her tax liability.
It may not be mandatory to file Schedule D if the only capital gains for the year are from a REIT or a mutual fund. Another important reminder is that a limit of $3,000 per year exists for the deduction of capital losses in excess of capital gains. The limit is $1,500 for a taxpayer with a filing status of married filing separately.
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