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
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
is used for capital gains recording purposes, according to Jim Calvin, investment management tax partner at
Deloitte & Touche
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
firstname.lastname@example.org 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)
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
- U.S. Individual Income Tax Return
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
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
- 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
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.
TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.
As originally published, this column contained an error. Please see our
Corrections and Clarifications for details.