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Video instructions and help with filling out and completing 1041 Schedule D Instructions 2021-2022

Instructions and Help about 1041 Schedule D Instructions 2021-2022

After reporting small business or self-employment income on Schedule C report any capital gains or losses on Schedule D a lot of people won't have any capital gains transactions but if you sell securities or other capital assets held outside of a retirement account you'll have to fill out Schedule D and don't worry the IRS has devised a system to help remind you of the need to report capital gains transactions if you sell any securities your broker or mutual fund should send you a 1099 B which lists the proceeds of the sale since the 1099 B lists the proceeds of the sale you'll have to include at least the gross proceeds on Schedule D however the 1099 B currently doesn't show the actual gain or loss you realized for that you're largely on your own when it comes to capital gains calculations your so-called basis in the property is important in its simplest sense your basis is the cost of the property but your basis can be adjusted up or down depending on circumstances let's say you invested one thousand dollars in a mutual fund whose shares were selling for $10 your one thousand dollar investment gives you 100 shares further assume that you made this investment in early January the fund moved up over the year and on December 15th of the same year the fund distributed to you $60 in dividends you reinvested these dividends in five shares of the fund when the fund was $12 a share a few days later on December 20th you sold all your holdings in the fund because you thought the market would go down assume your selling price was $12 a share so your sale of 105 shares at $12 a share yielded 1260 dollars your mutual fund then sends you a 1099 B which shows 1260 dollars in gross proceeds so what's your total gain on the sale you invested $1,000 back in January so you're reportable gain is 260 dollars right wrong you're reportable gain is actually only $200 not two hundred and sixty dollars that's because the $60 in reinvested dividends are added to the basis of your holdings like any additional purchase so your cost basis in the mutual fund is the original $1000 investment plus the $60 in reinvested dividends or one thousand and sixty dollars when you subtract this from your gross proceeds of one thousand two hundred and sixty dollars you get a net gain of two hundred dollars and in case you're wondering you do have to pay taxes on the $60 in distributed dividends that you received the $60 in dividends are reported on a 1099 - div and our taxed on Schedule B so if you reinvest your mutual fund dividends but don't adjust your cost basis up you'll wind up paying taxes twice on that dividend you'll pay ordinary income taxes once when the dividend is distributed and capital gains taxes once when you sell if you don't adjust your cost basis up unfortunately calculating your capital gains can get difficult the example I gave was simple but imagine if your mutual fund makes monthly distributions and you buy and sell chunks of the fund during the year determining your cost basis in this case can get complicated to help you determine your capital gain or loss many of the larger mutual funds are sending so called average cost data sheets to their investors these greatly simplify your calculation of capital gains or losses because you already know the proceeds and the fund company tells you the average cost there are however several ways to determine the cost basis for mutual fund shares that you sell one is the average cost basis another is the first end first out or FIFO method this is the IRS default method a third is the specific shares method in this case you tell your mutual fund usually through a letter which shares you want to sell if you want to minimise your gain you sell the shares which have the highest cost basis assuming the share price of your fund generally goes up the IRS default method of FIFO results in the highest taxed the specific shares method can yield the lowest tax and the average cost method yields attacks between the other two you can choose to calculate your cost basis with any of the three methods but once you've started to use a method you must continue to use that method until you completely cash out of the fund so which method is the best to use of the three methods I'd use the average cost method in most cases especially if your mutual fund already provides you with this information I'd use the average cost method for bond funds or stock funds that don't show large capital gains if you use the average cost method you might have to pay a little more in capital gains taxes but you'll save yourself some tedious calculations however if you have a fund that has large capital gains using the specific shares method can save you a lot in taxes finally remember that this whole discussion only applies to securities held outside of a retirement account you can have plenty of mutual funds stocks bonds and trade to your heart's content inside a retirement account as long as they're inside a retirement account you won't have to pay a cent in capital gains taxes you will however eventually have to pay ordinary income taxes when you pull your money out in retirement still you won't have to worry about your cost basis for retirement accounts because your cost basis in retirement account assets is usually zero that is everything you pull out is subject to taxes at ordinary income rates since ordinary income rates historically have been higher than capital gains rates you may pay a little more in taxes in the future but retirement accounts overall offer great.

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