ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, February 5, 1996 TAG: 9602050046
SECTION: MONEY PAGE: 6 EDITION: METRO
Q: Can you please help me find the tax liability for the profit on the sale of common stock?
In December of 1965, I was given one share of General Motors stock. In November of 1981, I purchased 18 shares (for a total of 19 shares). The stock split in March 1989, and I then had a total of 38 shares.
GM offered a buy-back plan this past fall at $47.14 per share. I sold the stock for a gross payment of $1,791.22 less a service fee of $28.50 for a net payment of $1,762.72.
I have the purchase records for my 1981 purchase, but not the records for 1965 when I was a child. Can you help me figure how much I owe Uncle Sam?
A: The sale of your shares back to General Motors is referred to as a stock redemption. Your stock redemption will be treated as a long-term capital gain (or loss) in the year it occurred. Income (or loss) from capital gains is calculated on Schedule D, combined with other capital gains and losses (if any) and transferred to line 13 of page 1 of form 1040. The gain is calculated by subtracting your basis in the stock from the sales proceeds, net of any expenses associated with the sale such as the service fee.
Basis in stock is generally the purchase price of the shares acquired plus brokerage commissions.
Calculating the basis in stock acquired in the form of a gift sometimes can be complicated.
Assuming the single share was purchased and given to you on or about the same date, your basis in the gift share of stock, for figuring capital gain, would be equal to the donor's basis. In tax parlance, the donor is the individual making the gift.
The donor's basis would typically be the amount the donor paid for the single share when it was purchased, plus commissions. Assuming the one share of stock was also purchased in December 1965, you can call a brokerage firm to obtain the trading value of General Motors stock at that time, or you can check with the publication entitled ISL Daily Stock Price Index, available at area libraries including the main branch of the Roanoke City Library.
The stock split in 1989 increased the number of shares owned, but did not increase the basis of the shares. The cost to the donor of the original share, plus the purchase price, including brokerage commission, of the shares acquired in 1981, continues to be your aggregate basis in the 38 shares of General Motors stock. |- Answered by Stan Boatwright of Lucas & Boatwright
Q: I cashed some CDs to get a higher interest rate and paid a penalty. The amount of interest for last year is on the 1099 form I have.
Can I take the penalty off the interest? Or would the IRS consider the penalty another type of deduction? What forms do I use to file this loss?
A: You should not take the penalty off the interest income. The interest income reported to you on Form 1099 should be reported on Form 1040, Schedule B, Interest and Dividend Income. The penalty you paid should be reported as an adjustment to your income on Form 1040, Line 28, "Penalty on early withdrawal of savings."
The IRS has tremendous capabilities in the area of matching items reported in income tax returns with reports filed from payers of interest, dividends, gross proceeds from sales, pension distributions, wages, income taxes withheld and so forth. Employers, banks, brokerage houses, insurance companies and other payers are required to submit 1099s and W-2s to the IRS and the Social Security Administration. Both of these agencies can easily detect discrepancies between what is reported as income by a taxpayer and what is reported as having been paid to that taxpayer. Those discrepancies give rise to notices from the IRS and may "flag" a tax return for closer review by tax authorities. It is an important step in income tax preparation to make sure you have reported all such information on your return. |- Answered by Valerie J. Kowalski of Kowalski & Associates
Tax-related questions from our readers are answered by members of the Roanoke chapter of the Virginia Society of Certified Public Accountants. This feature runs every Monday on the Money Page through April 8. Please send your questions to Tax Questions, The Roanoke Times, P.O. Box 2491, Roanoke 24010.
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