Reporting Capital Gains
An eagle-eyed reader raised an interesting question last week. He noticed that on Schedule D, where you report capital gains and losses, the instructions call for adding short-term gains and long-term gains together and carrying the total over to the face of the Form 1040.
"If the full amount is reported as profit, how do you get the benefit of the special maximum 15% rate for long-term gains?" he asked. "After all, short-term gains can be taxed at a rate as high as 35%."
Good point. And, if you simply carry over the total to the 1040 and then go to the tax tables to figure your tax, you will overpay.
But, that's not what you're supposed to do. Although you combine short- and long-term profits on the Schedule D, you use a special worksheet to figure your tax -- and that worksheet breaks out your long-term gains and applies the special 15% rate (5% if you're otherwise in the 10% or 15% bracket).
There are actually two special worksheets. The one used by most taxpayers is in the 1040 instruction packet.
The other, even more complicated worksheet, is used by folks with gain from collectibles or gain attributable to depreciation. It's in the Schedule D instructions.
The worksheets are monsters, but they work. Be patient. One reason I love tax software is that it handles all the number crunching for you. My favorite is Turbo Tax from Intuit because it includes tax advice from Kiplinger's.