Limitation on Capital Losses - Essay Example

Moreover, Anita can claim a deduction of $600 from taxable income, since it is well within the limits amounting to $3000, under Section 1211 (Cornell University Law School, “Limitation on Capital Losses”). While analyzing this situation, Anita, being a taxpayer has to refer to Section 267 of the US Code of taxation, if she wants to sell the stocks to her sister, Kathy (Cornell University Law School, “Losses, Expenses and Interest with respect to transactions between Related Tax Payers”). Under Section 267, Kathy would be considered as a related party in this type of transaction between the two, Anita and Kathy and hence the amount of deduction will not be available then.

However, the sale of the stocks to her friend, Marcia will not attract Section 267.ConclusionHence, it can be concluded that it is advisable for Anita to either sell the stocks to Marcia or directly to TOM, Inc. and take benefit of the available deduction of $600.Situation #2IssueWhile preparing the agreement of divorce between Dave and Marcia, the issues that arise in this case are:1. Tax liability involved in the transfer of the home to Marcia and the transfer of the boat to Dave.2. Marcia has to decide whether to take the securities or the cash payments from Dave.

ResearchMarcia and Dave, who are married to each other is planning for a divorce agreement. They have two children and will be in the custody of Marcia after their separation. In accordance with the divorce agreement, Dave decides to keep the boat and give away the home to Marcia. Dave and Marcia will also have to decide upon whether Marcia will be receiving the stocks which were acquired at $100,000 and having a present market value of $150,000 or in the form of yearly payments to Marcia for 5 years, with an included yearly interest @ 8% p.a. AnalysisOn analyzing this situation, the first consideration would be the tax consequences as a result of the transfer and settlement of properties.

The immediate tax implications will be nil because, Under Section 1041, any transfer of property within 1 year of the divorce will not amount to any gain or loss. However, it can have an effect in future, after 1 year, when either the home or the boat is sold by any of them and it can attract capital gain taxes. While considering the issue about accepting the yearly cash payments, Marcia has to take note of whether the money received will be paid as alimony or not. Sec 71 explains the requirements of a sum of money being treated as alimony.

Alimony will be a taxable income in the hands of Marcia and would be available as deductions from Adjusted Gross Income for Dave. Moreover, Marcia being the custodian of two children will be rewarded with child support as a deduction from taxable income. The agreement should have a clause regarding the end of the contract of payment to Marcia on her death or when she gets married again. If Marcia wishes to accept the securities, she can consider its sale, resulting in a capital gain that can be adjusted with any other capital losses she might incur in any year.

ConclusionHence, it can be concluded that while preparing the agreement of divorce, both Dave and Marcia should make the property transfers in a way so that will attract minimum tax liability in future. It is advisable for Marcia to receive the securities and sell them when required to set off any capital losses that she might incur in future.