If My Year-End Trade Settles In January, When Are Taxes Due?

Before tackling your questions this week, we have a year-end trading issue to address.

In David Shabelman's Dec. 31 Tech Report, Michael Murphy, editor of Overpriced Stock Service, was quoted saying that individual investors could sell stocks on Dec. 29 and have settlement of the trades after the first of the year for tax purposes, implying that the gain would count for 1999.

This raised a multitude of concerns. Shabelman quickly cleared the issue up on Jan. 4, but he asked me to weigh in with some more details. No problem, David. Let's get to the bottom of this once and for all.

Here's the issue: If you make a trade at year end that is settled after Jan. 1, in what year do you record the capital gain or loss?

There are two dates of which you need to be aware -- the trade date and the settlement date. The trade date is the day on which the transaction occurs. On the settlement date either money or securities are exchanged. The settlement date usually is around three days after the trade date.

If you are long a stock and you sell it, the trade date is the day that counts for capital gains purposes. So if you sold 1,000 shares of Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) on Dec. 31, any gain or loss would count for 1998. It doesn't matter that money or securities haven't changed hands yet.

But if you make a short sale, the settlement date is used for capital gains recording purposes, according to Jim Calvin, investment management tax partner at Deloitte & Touche in Boston.

Why the difference? The idea behind a short position is that you're hoping the position is going to fall. So you borrow the stock from a broker-dealer and sell the certificate on the open market. Then a few days later, you buy back the stock -- hopefully at a lower price. That's the trade date. But you can't really determine how much you've gained (or lost) until you return the stock to your broker, says Calvin. So that's why the settlement date is used to record capital gains in a short sale.

As for options, the trade date generally is the day that counts for tax purposes.

Hope that helps. Now let's get on to your questions. Keep sending any new ones to [e-mail] and please remember to include your full name.

At What Point Do I Jump Into a New Tax Bracket?

I would like information on where the tax brackets break. I'm currently in the 28% bracket, and need to know where that would change.

John Smith (really)

John,

I've gotten many requests to post these 1998 tax tables. So here they are: (These rates are applied to your taxable income from line 39 of your Form 1040 - U.S. Individual Income Tax Return.)

Married filing jointly and surviving spouse If taxable income is: The tax is: Not over $42,350 15% Over $42,350 but not over $102,300 $6,352.50, plus 28% of the excess over $42,350 Over $102,300 but not over $155,950 $23,138.50, plus 31% of the excess over $102,300 Over $155,950 but not over $278,450 $39,770, plus 36% of the excess over $155,950 Over $278,450 $83,870 plus 39.6% of the excess over $278,450

Head of household If taxable income is: The tax is: Not over $33,950 15% of taxable income Over $33,950 but not over $87,700 $5,092.50, plus 28% of the excess over $33,950 Over $87,700 but not over $142,000 $20,142.50, plus 31% of the excess over $87,700 Over $142,000 but not over $278,450 $36,975.50, plus 36% of the excess over $142,000 Over $278,450 $86,097.50, plus 39.6% of the excess over $278,450

Single If taxable income is: The tax is: Not over $25,350 15% of taxable income Over $25,350 but not over $61,400 $3,802.50 plus 28% of the excess over $25,350 Over $61,400 but not over $128,100 $13,896.50, plus 31% of the excess over $61,400 Over $128,100 but not over $278,450 $34,573.50, plus 36% of the excess over $128,100 Over $278,450 $88,699.50, plus 39.6% of the excess over $278,450

Married filing separately If taxable income is: The tax is: Not over $21,175 15% of taxable income Over $21,175 but not over $51,150 $3,176.25, plus 28% of the excess over $21,175 Over $51,150 but not over $77,975 $11,569.25, plus 31% of the excess over $51,150 Over $77,975 but not over $139,225 $19,885, plus 36% of the excess over $77,975 Over $139,225 $41,935, plus 39.6% of the excess over $139,225

Points for Scoring Your Dream Home

We bought our dream home in 1998. This is not our first home. Are the closing points on our mortgage tax deductible?

Mollie Harry

Mollie,

Points (aka loan origination fees, maximum loan charges, loan discount or discount points) are charges paid to obtain a home mortgage, according to the Ernst & Young Tax Guide.

To get a full deduction for those points, they must have been paid (or will be paid) directly by you, the taxpayer. (If, say, the seller pays the points, you can't deduct them.) Those points also must have been paid to acquire your primary residence, and your mortgage must be secured by that residence.

But you can't fully deduct those points if they were paid on a loan for home improvements, a vacation home, for refinancing or for a home equity loan. Any points paid to refinance are deducted in equal portions over the period of the loan.

But be sure to check out the Internal Revenue Service's Publication 936 - Home Mortgage Interest Deduction for more details.

More on MSAs

Do you happen to know if "earned income" (reported for self-employed persons on Schedule C) is required to establish a Medical Savings Account (MSA)? I am filing as a trader with income on Schedule D and expenses on Schedule C.

Steve Chiang

Steve,

Unfortunately, the deduction for your contributions to a Medical Savings Account is limited to your earned income, says Clarence Kehoe, partner and director of employee benefits at Anchin, Block & Anchin (full disclosure -- our accountants).

So if, as a trader, you have no earned income -- net earnings as a self-employed person -- you cannot deduct your payments to the MSA.

Section 220(b)(4) of the tax code has the technical jargon. Check out this previous Tax Forum for more details on these MSAs.