Long-term capital gain accounts establish a type of asset account designed to handle a long-term capital gain asset. This type of account does not tax any gain in asset value as long as the gain remains in the account.

Payouts Of Long-Term Capital Investment Gains

When long-term funds (held for over one year) are removed from the account, part of each payout is considered as a return of previously taxed funds (i.e., your cost basis) and part as untaxed gains. You will owe income taxes on the part of the payout that's considered untaxed gains. The tax is calculated using the long-term capital gain rate.

The amount of each payment that won't be taxed is computed by establishing an excludable amount using the ratio of the cost basis to the account balance. Taxes are due on the net amount after the excludable amount is subtracted from the payout. The cost basis is adjusted downwards by the excludable amount.

Besides the part of the yearly investment gain that is held in the account for the long-term, another part of the investment gain can be distributed to the account yearly as a realized gain. You can define parameters for these yearly distributions. You can define what part of the yearly investment gain is a distributed realized gain. Parameters can be defined to apportion the realized gain into parts corresponding to qualified dividend income, long-term gain income, tax-free income, and ordinary income. The appropriate taxes are charged to each part. The resulting after-tax income can be kept in the account with an increase in the adjusted cost basis, or it can be removed through the use of withdrawal instructions or transfer instructions.

Tax Treatment For Yearly Distribution Of Realized Gains

You are able to define the tax treatment of realized gain from an account that is holding a long-term security, such as a mutual fund or a dividend bearing stock. The security will produce a total return yearly as specified by the earnings rate that is applied to the account, but some fraction of that total return can be distributed to the account as realized gains for the year.

These realized gains include dividends and capital gains distributions that result in current or future tax consequences. They can be modeled in your Forecaster4 plan by specifying some or all of the following parameters.

- The realized gain amount as some fraction of the total return

- A qualified dividend amount as some fraction of the realized gain

- A long-term capital gain amount as some fraction of the realized gain

- A tax-free income amount as some fraction of the realized gain

- An ordinary income (nonqualified dividend or short-term gain) amount as some fraction of the realized gain.
 

The account's allocation data entry screen allows you to enter the percentage of the total return that is the realized gain, and the percentages to be used with the realized gain to determine the other amounts listed above. The resulting amounts are then handled as described below during the yearly calculations.

- The realized gain is subtracted from the total return and the reduced amount is added to the account balance.

- Qualified dividends are taxed using the plan's qualified dividend tax rate

- Long-term capital gains are taxed using the plan's long-term tax rate

- Ordinary income is taxed using your specified income tax rate

- The net, after-tax realized gain amount can be reinvested or spent
 

Note that all tax rates are the sum of the appropriate federal rate and the state ordinary income rate.

The after-tax realized gain amount can be handled in two ways. If you specify a withdrawal instruction for the realized gain, the after-tax funds are removed from the account and applied to the year's retirement living expenses. If you specify a transfer instruction for the realized gain, the after-tax funds are removed from the account and placed in the destination account.

If a withdrawal or transfer for the realized gain is not specified, the after-tax funds are reinvested in the security. The amount is added to the account balance and increases the account's adjusted cost basis.

A long-term gain will be realized at the sale (or partial sale) of the asset. A sale (or partial sale) from a long-term account can be modeled in your Forecaster4 plan by using a withdrawal instruction or a transfer instruction to remove other amounts (not the realized gain).