Tag: stock

Posted on by Jan Roberg

Reporting Worthless Stock on Your Tax Return

Losing money in the stock market is frustrating. Remember to take advantage of those losses on your tax return.

Losing money in the stock market is frustrating. Remember to take advantage of those losses on your tax return.

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Did you own stock in a company that’s now worthless?  For Example:  In 2013, Kodak’s old stock was cancelled when the company emerged from bankruptcy.  If you owned the old Kodak stock; it’s worthless now.  So how do you claim that loss on your tax return?

 

You’re going to report it as a sale of stock on form 8949.  Here’s a link to that form:  http://www.irs.gov/pub/irs-pdf/f8949.pdf The 8949 form flows through to something call the Schedule D which will then flow through to your regular 1040 tax return.  Tax software should handle it for you, but if you’re still doing returns by hand, remember you’ll need to send both the 8949 and the Schedule D in with your tax return.

 

For the sale date, you’re going to put 12/31/2013.  Under Proceeds, you’re going to put $0.  You’ll fill in the other boxes with the name of the stock, how many shares you owned and what your basis in the stock was.  Basis is what you paid for it, plus any commission fees that you may have paid to the broker.  (For what it’s worth, Kodak emerged from bankruptcy on September 3, 2013.  Tax preparers usually don’t have access to that information when preparing a return with worthless stock on it, that’s why 12/31 is generally used as the sale date.  If you know the actual date your stock became worthless, you may use it, but don’t let it keep you from preparing your return.)

 

Because stock became worthless, you’re going to have a capital loss.  You’ll use that loss to offset other capital gains.  If you have no other gains, you can use up to $3,000 of loss to offset your other income.   If you have more than $3,000 of loss, you can carry forward the excess losses and keep using them until they run out.

 

It’s important to know the difference between worthless stock and nearly worthless stock.   In Kodak’s case, once they filed for bankruptcy back in 2012 the shares had very little value.  You can’t write off “nearly worthless” stock unless you actually sell it.  (Which isn’t easy to do.)

 

Once the company emerges from bankruptcy, the stock in question is cancelled and you can write off the loss.

Posted on by Jan Roberg

Gifting Stock with Long Term Capital Gains—Helping Granny and Yourself

grandma b+w

Photo by Amanda Schutz on Flickr.com

I recently wrote about some of the basics of capital gains taxes.  Today I’m going to talk about one strategy that you might be able to use to reduce those taxes.

 

The old strategy to avoid paying long term capital gains tax was to gift appreciated stock to your children because they’d be in the 0% capital gains tax bracket.  But now—with the kiddie tax rules—that strategy doesn’t work anymore.  Children are taxed at their parent’s rate.

 

But there may be another way around that rule without using your kids:  use your parents or grandparents instead!                  People in the 15% or lower income tax bracket are in the zero percent capital gains tax bracket.   If you have older family members that you’re helping out financially, gifting stock could be a win/win solution for both of you.

 

Let’s say your mom is retired and basically living off of social security.  You want to help her out by giving her $10,000 to cover some of her expenses.  You can just “gift” her the money—no tax consequences for her or you, or you could “gift” her some appreciated stock.  If possible, I vote for the appreciated stock.

 

Here’s why:  suppose you have some XYZ stock that you bought years ago for $1,000, but today it’s worth $10,000.  (Good for you, by the way.)   If you sell it now, you’ll have to pay $1,350 in long term capital gains tax.  ($10,000 – $1,000 = $9,000 capital gain.  Multiply that by the 15% capital gains tax rate, then $9,000 x .15 = $1,350.)

 

Now if your mom’s only income is social security, then she’s in the zero percent capital gains tax bracket so her tax would be zero!  See why this is a good idea?

 

For 2012 you can gift up to $13,000 to someone with no gift tax consequences.  If you are married, then you and your spouse could each gift $13,000 to one person (although you’d have to prepare a gift tax return to show that you were gift splitting.)

 

This gifting of stock isn’t just limited to your parents; you can potentially gift stock to anyone that is in the zero percent capital gains tax bracket (except for your children.)  Of course you don’t want to just gift stock to people you weren’t planning of giving money to in the first place.  Once you make the gift, it’s not your money any longer.

 

This strategy may not be a viable option for 2013 so if you’re thinking about gifting stock, you should at least get your ducks in a row now so that you can do the transactions before December 31st if necessary.

 

Be sure to run the numbers with your parent’s first before just “gifting” stock to them.  There may be other considerations that you’re unaware of where the capital gains could create a problem for them.  Remember, reducing your tax burden isn’t such a great idea if it’s going to cause problems for your parents.  Be sure to look at the big picture.