Tax Law (Questions About Taxes)/Selling stock

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Question
My parents (in their early 90s of age)are in assisted living and a nursing home in Kansas.  I have 2 brothers and myself. One of my brothers who has POA and administrator of their trust, is thinking of selling the folk's stock to help cover the folk's expenses. The stock was inherited by our father when his last parent died in 1989. He was saying the capital gains tax this year is 15 percent and next year it is 20 percent.  The folks have not paid any income tax (federal or state) due to the cost of their medical care greatly exceeds their income since they have lived in this nursing home. My brother explained it that the folk's would have to pay taxes on the stock when sold.  He said it was somehow separate from paying taxes on their income.  Is that correct?  I would think that if my folks have a lot of medical expenses, why isn't the capital gain tax deducted from medical exprnses and if the capital gain exceeds their medical expenses then that is the difference they would pay as tax?  Besides federal tax, would they also pay Kansas state income tax on capital gains?  Any guidance would be appreciated.  Thank you.

Answer
Susan,

Thanks for your question.  You have been given some bad information.

1. Capital gains are not taxed separately from income taxes. There is a capital gain rate which applies to the sale of long-term capital assets, which is more favorable than the rate on ordinary income.  Itemized deductions, personal exemptions, and credits may be taken against these gains.

You are taxed on the gain only, not the entire sales price.  Your gain is the difference in the proceeds from the sale minus your cost basis.  Cost basis in this case would be the fair market value on the date the stock was inherited by your father.

2. You don't state, the anticipated amount of the gain so I can't be as specific as I could be given additional information. The capital gain rate increased for 2013 and does not change for 2014.  However, there is a 3.8% additional tax on gains when adjusted gross income exceeds $250,000.

The applicable capital gain rate is based on their adjusted gross income.  If they are in the 10 or 15% marginal bracket, the capital gain rate is zero.  If they are in the 25, 28, 33 or 35% bracket, the capital gain rate is 15%.  If they are in the 39.6% bracket the rates would be 20%.  

Since I don't know the dollar amounts involved, I would anticipate that most of the gain would be subject to a zero rate, but if large enough, they could be taxed at 15% on a portion of the gain.

3. Regardless of whether they will have a tax liability, they should file a return.  When the sale is made, they will receive a 1099-B at the end of the year, showing the sale proceeds.  Since the broker most likely does not have your cost basis in the stock, they will not show basis on the 1099-B (this is a fairly new law).  If the IRS sees the 1099-B but cannot match the document with a tax return, they will send you a CP-2000 form, levying tax on the gross proceeds of the sale. Filing a return will avoid this headache.

4. Kansas state taxes are based on the Federal return, so the same rules would generally apply.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

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I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

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I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

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FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

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DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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