If you play the stock market, it is wise to know about the tax consequences of your securities transactions.

Capital Gains Tax First of all, any profit you enjoy from the sale of a stock held for at least a full year is taxed at the long term capital gains rate, which is lower than the rate applied to your other taxable income.  If you are in the 10%-15% tax bracket your rate on capital gains is 0%.  That’s right, zero. The 15% capital gains rate applies to those in the 25% tax bracket. Capital gains peaks out at 20% for higher income taxpayers. If the stock was held for less than a year, ordinary income tax rates apply. It is therefore beneficial tax-wise to hold the investment for longer than a year.

Dividends. The capital gains rate applies to “qualified” dividends. For dividends to be classified as “qualified” they must be paid by a U.S. corporation or a qualified foreign corporation and the holding period of the stock must be more than 60 days. There are plenty of other exceptions and definitions so check with your broker or tax advisor to see if the dividends for your stock holdings are “qualified” or not. Dividends on stock held in a qualified retirement plan are not taxable income.

Congress enacted the lower capital gains rate to drive investment. After all, most tax laws are passed as a form of directing social behaviors.

The Wash Rule Many investors benefit from selling a stock in a losing position to offset a gain, then turn around and buy the stock right back.

Well, the IRS will not allow an investor to claim a capital loss if you sell a stock and buy it back within 30 days. It is called the “wash rule” and does not allow for a capital loss. If you sell a stock and buy it back within 30 days, the IRS will disallow the capital loss and you will lose the offset.

Capital Losses One of the big limitations in stock investing is the amount of losses you are allowed to deduct on your tax return. If you sell stocks at a loss, you may deduct only $3,000 in losses per year. The remainder of the loss is carried forward to future years. You may apply capital losses against capital gains in the current and future years to net out the overall profit or loss.

Deductible Investment Expenses A tax deduction often overlooked by investors is the cost of management fees paid to brokers, usually for management of mutual fund accounts or for advisory services. You may deduct these fees as an investment expense on Schedule A of your tax return.  Some brokerage 1099s or year-end statements will state the total paid for the year.  But many do not. You may have to call your broker to find out how much you paid. Be sure to provide this information to your tax pro.

Stock Sales When determining your profit from a stock sale, it’s important to understand not only the formula but the meaning of the variables in the formula. Certain circumstances applied to the variables can reduce your tax liability when you sell. Many taxpayers believe they must pay taxes on the full amount of the check they receive from the sale. That is not true. You can subtract your basis.

The formula is: Sales Proceeds – Basis = Taxable Profit or Deductible Loss.

Sales proceeds can be reduced by commissions paid to the broker.

Basis is the cost of the stock plus any reinvested dividends and commissions paid for acquisition.  If you inherited the stock, the basis is the fair market value of the stock on the date of the decedent’s death or the alternate valuation date. If the stock was received as a gift, the basis is the lower of the fair market value or the basis of the donor at the time the gift was made.

Audit Taxpayers oftentimes forget about a stock sale when compiling their income tax return. This results in a CP-2000 letter from the IRS. The letter is about eight pages long and somewhere in the middle is a listing of omitted items and a calculation of the tax liability on those items. If you receive one showing an omitted stock sale, don’t just pay the tax bill. The IRS only knows about the stock sale; they have no clue as to what your basis in the stock is. Remember the formula earlier? You may actually have taken a loss on the stock and that means no tax liability whatsoever. In fact, you may be entitled to a refund. So call the phone number on the front of the letter and let them know that you will amend that tax return. The IRS may instruct you to complete a Schedule D declaring the details of the stock sale and ask you to fax it to them. They will adjust the tax due (if any) accordingly.

However, beginning January 1, 2011 as a part of the Emergency Economic Stabilization Act of 2008, brokerage firms are required to report the cost basis and gain/loss information to the IRS on their form 1099. This streamlines the tax preparation process considerably.

For most folks, the only time you’ve had to deal with gift tax was when you drew that dreaded card while playing Monopoly and had to throw a piece of pink currency into the center of the board. But if you know a little about the tax law surrounding gift tax, you’ll find that a little planning can keep you from paying lots of green into the center of the gaping mouth of the IRS.

Over the years, I’ve fielded a number of questions relating to the taxability of gifts. They usually go like this: “My grandmother gave me twenty grand for Christmas. How much tax do I have to pay on that?”

The answer always surprises them. The answer is none. Zero. Nada. Grandma can give you twenty million bucks and you wouldn’t owe a dime in taxes. How can that be? Well, the first rule on gift taxes is that the recipient isn’t taxed. It’s the giver who winds up with the tax bill.

Of course, I always get a different question from the giver, namely, “I gave my grandson twenty grand for Christmas. Can I write that off?” They just hate it when I tell them that not only is it NOT a write-off, but they could be liable for gift tax.

First of all, what is a gift? According to the IRS, “It’s a transfer of property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return.” If you sell something for less than its fair market value or if you make an interest-free loan or even a reduced-interest loan, you could be making a gift.

Just about anything you give away could be subject to gift tax. But there are exceptions:

1. Bestow all you want on your spouse. Get lavish. No gift taxes for transfers to a husband or wife. But you will have to file a gift tax return if you give your spouse an interest in property that will be ended by some future event.
2. Pay tuition or medical expenses for anyone – as long as you pay it directly to the medical or educational institution. No tax will be due.
3. Be generous with bona fide charities – these gifts are deductible and not subject to gift tax.
4. Gifts to political organizations are not subject to gift tax, nor are they tax deductible.
5. Gifts, excluding gifts of future interests, that are less than the annual exclusion for the calendar year are not taxable transactions.

The annual exclusion for all tax years beginning January 1, 2014 is $14,000. This exclusion amount did not change for 2015. It’s still $14,000. You can give that much without incurring a tax liability or having to file a gift tax return. Anything above that amount may be subject to gift tax. Married couples can gift a total of $28,000 (twice the annual exclusion) to a single recipient without incurring a gift tax liability.

If you wish to give more than the annual exclusion, you may be able to defer taxes on the gift by applying the unified credit (from your future estate tax) to the gift. This reduces your unified credit in future years but is a good tool to legally avoid paying gift tax now. You are still required to file Form 709 to declare your gifts.

Business Gifts:

Some gifts, other than charitable contributions, are deductible. You may give business gifts up to $25 per year per recipient to clients, associates, and employees and deduct them on your income tax return. Wrapping paper, gift cards, engraving, insurance and mailing are considered incidental expenses and not included in the $25 cap.

The $25 limitation has been around since Day One and I find it aggravating. You’d think the IRS would have adjusted that amount for inflation.

And you can’t double this gift deduction by including your spouse or business partner as a giver to the same recipient. Under this definition, you and your spouse or you and your business partners are considered one giver.

If you wish to spend more than $25 – you know, like if you don’t want to appear cheap – and get the write-off – you may consider giving something that would fall under the category of meals and entertainment. These expenses are subject to a 50% hair cut but what the heck. It could be more advantageous and enjoyable to take your client to a $100 dinner and get a $50 write off than spend $50 on a gift but enjoy only a $25 deduction.

If you are planning to make gifts above the annual exclusion, especially this year with no estate tax to worry about, check with your tax pro to decide how to gift in the most economical and least taxable method possible.

Tommy Chong of Cheech and Chong fame, the standup/movie/music icon, has added entrepreneur to his list of achievements. But the businessman is staying in character with the Tommy Chong we have all grown to know and love. It’s all about weed. His new business venture in Colorado is manufacturing two products for distribution: Chong Star, a form of weed high in CBD and THC named after Dancing with the Stars (DWTS) in which Chong was a contestant last season, and “Tommy Chong’s Smoke Swipes” which instantly rid clothes and hair of smoky smells from cigars, cigarettes and cannabis. Chong tells me that Len Goodman, a judge on DWTS and a heavy cigar smoker, swears by the swipes product.

According to Chong, growing, distributing, and selling marijuana for both medicinal and recreational purposes is legal in Colorado as long as the product stays within the state borders. The product is also subject to sales tax which is levied at the dispensary level. Chong believes that levying a sales tax is tax overload on citizens. He says, “We are already taxed to death on everything.”

However, these activities are still illegal at the federal level. Even so, Chong does not fear reprisal from the Feds. He feels that pending court cases on the side of legalizing marijuana and, finally, recognition of its medicinal qualities will soon result in federal legalization of the drug.

Chong credits his remission from prostate cancer to the use of a hemp product under the direction of his naturopath in Canada. He strongly believes in its medicinal qualities. You certainly don’t have the litany of “side effects include…” when it comes to marijuana. “After all,” Chong adds, “The worst thing that can happen if you smoke too much marijuana is that you will regurgitate. This demonstrates that the body is equipped to handle it. When it comes to marijuana, the medical benefits far outweigh these issues.”

Chong adds that government resistance to legalization can also be attributed to their inability to regulate. He states, “You cannot regulate marijuana in the same way you can regulate alcohol because there is no one manufacturing point. It’s a cottage industry.”

The trend toward legalization is also evident with the leniency the IRS has demonstrated the last few years towards the marijuana industry. Previously, business owners were required to report their illegal income without the benefit of taking deductions against it. Things have changed. Beginning in 2011, deductions for cost of goods sold, which are the costs involved in production are allowed on tax returns. Most marijuana farmers are using the “full absorption costing rules” and “unified capitalization rules” to include administrative, overhead and direct costs normally not associated with cost of goods sold. In other words, they are basically writing off every expense. And the IRS is allowing it.

Chong is excited about his new enterprise. Although, he says, “Owning a small business is like doing time in jail. You are dedicated to that business. You don’t have a life. It absorbs all of your time. When I was in jail I had more time to myself than I had on the outside.”

Chong was jailed in 2003 for 9 months for selling marijuana paraphernalia.

Chong is joined by his son Paris and John Paul Cohen, a former Sanwa Bank executive, in his new business. “These guys handle the business end of things. I am not a businessman; I am an artist,” Chong states. It’s his wife Shelby, who he says has the business brains in the family. She has an accounting background. He always heeds her advice.

Chong says the best business advice he’s ever received is to prepay his taxes. “If you pay too much, you get a refund. And you’re not on the red flag list. Because you paid in advance, they’ll likely leave you alone.”

The best advice he has to offer to other entrepreneurs, however, is what he tells his son, “Research, research, research. You need to know habits and trends. There’s no excuse to not know everything you need to know. The knowledge is at your fingertips.”

Tonight will be our first date. Luke is taking me to dinner. Just two more hours before I get to see him! I feel a tingle as I move the queen of hearts below the king of spades. I’m like a teenage girl with the rush and crush of it all. You’d never know I was a 34 year old professional woman. I feel like snapping my gum and calling my girlfriends flat out on my stomach on the bed with legs raised behind me kicking off shoes and yammering into the phone, “and he’s all, and I’m like, and he’s like…” Christ. But I can’t help the delicious burst of joy that’s running from my tummy into my chest.

My life is about to change. I smile and move the four of clubs across to the five of hearts. Yes, my life is about to change. I can just feel it. A new man. A new adventure.

I look up. Andie is shouting, “You can’t go in there! You can’t go in there without an appointment!” And from the hallway, the thundering of heavy footsteps advancing across the oak plank floor. “Wait!”

Then a man rushing through my open office door. His handsome face is puffy, red and vaguely familiar. It blurs as he speeds to the front of my desk. He upends a black satchel and my eyes grow large as they move from his face down to stacks of bound hundred dollar bills tumbling onto the desktop, off the desk onto the floor. Mounds and mounds of them. I can’t even guess how much.

“Pay the IRS for me.” The words tumble just as rapidly from his mouth as the packets tumble onto the desktop. A waft of stagnant scotch hits my nose. Is he drunk?

I finally recognize the new client with the horrendous tax problem who paid me a small advance a couple of months ago, signed the IRS’ Power of Attorney form, but never returned with the paperwork I needed in order to proceed. “Simon? What’s going on?” He is so intent on his task that he doesn’t answer. “Simon?” I prompt again this time a little more insistently.

Simon scoops the last banded pack from the satchel, finally looks at me and says, “I trust you Kim. Pay the IRS for me. I’ll be in touch.”

By then Andie is in the doorway but rears back quickly when he barrels back through it. We watch him leave then stare at each other slack jawed for a beat. Then I’m up and running after him. “Simon! Wait!” He’s gone through the front door. I whip the door open, step out to the landing, and pause. I look to the right, nothing. I look to the left and see him running down the sidewalk. Shielding the late afternoon sun from my eyes with one hand, I call out to him again, “Wait, Simon. You have to come back!”

A squeal of brakes causes me to look across the street. A bronze vintage Oldsmobile, something out of the 1960’s, pulls to a stop. A woman in big round sunglasses, sun hat, and gloved hands, lowers the window, brings up a revolver and shoots Simon. I watch as he crumbles to the ground and the satchel flies out of his hands.

The car door swings open and the woman starts to get out but looks over at me as I scream. She turns toward me, raises the gun and before I can react, she fires. I hear a hiss and smell gunpowder as the bullet whizzes by my ear and lodges into the door frame behind me. Throwing myself to the ground, I crawl back inside and slam the door with my foot. I hear the crack of one more bullet then hear the sound of peeling rubber.

I stay on the floor. Tears erupt from my eyes as I hyperventilate. Alarmed, Andie is leaning over me. “What happened? What’s going on?” Her voice is anxious.

I put my hand over my heart and breathe deeply, exhaling loudly, trying to slow my breathing. Finally, I can speak. “Call the police, Andie. Call the police. And get an ambulance. She shot Simon.”

“What? Who? Who shot Simon? What?”

I glower at her. “Andie. Just. Call. Now.”

The door bursts open. I scream and pull myself into a fetal position, covering my face with my hands. Andie jumps back. After a terrifying moment, I hear her say, “Damn! I was just about to call you.”

Slowly, I pull my hands down from my face to see a police officer, hand poised over his weapon. It’s Mac, Officer McCarthy, who interviewed me several months ago when Dominic Rodriguez disappeared. Outside I hear another officer speaking into a two-way, asking for an ambulance.

I sit up feeling a tad embarrassed. Andie lowers a hand to help me up. I brush off my skirt. Mac sighs and drops his hand to his side. “It’s Kim, right? Kim Stillwell?” I nod as he pulls a small notebook from a chest pocket. “Well, you want to tell me what happened this time?”

Harley the Dawg says: You may be able to write off a service animal, security dog (they scare me), and herding farm dog. Talk to your tax pro to see if you qualify

Join Bonnie Lee, E.A., author of Taxpertise, for tax tips for foodies at the epicurean connection.

For details, contact:
sheana@vom.com | 707.935.7960 | 122 West Napa Street, Sonoma, CA 95476

Dear Bonnie or Harley the Dawg,

When will the IRS send out the rebate checks and how do I find out how much I will get?

Cindy

Dear Harley the Dawg,

I just got a divorce and my ex-husband is giving me $50,000 from a CD we had together. Do I have to pay taxes on that? If I do, I’m gonna be hella mad.

Judy