INCOME TAX - CAPITAL GAINS AND LOSSES

RAB-89-9. This Bulletin is supplemental to Revenue Administrative Bulletin 1988-43 "Taxability of Capital Gains and Losses Reported on Schedule D." It explains and provides examples of Michigan income tax treatment of capital gains and losses both before and after the effective date of the Internal Revenue Code (IRC) of 1986.

Introduction

The following examples illustrate the effects of capital gains and losses on Michigan taxable income. All examples are based on a married taxpayer filing jointly. The examples also explain the effect of capital gains and losses on "household income" for Michigan tax credit purposes.

Note: Capital Loss Deduction Computation:

1. For the period prior to January 1, 1987, the annual capital loss deduction is limited to the lesser of:

1. $3,000, or
2. 50% of the net long-term capital loss for that year.

2. For the period after January 1, 1987, the annual capital loss deduction is limited to the lesser of:

1. $3,000, or
2. 100% of the net long-term capital loss for that year.

Example 1

Taxpayer A has included in his Federal Schedule D out-of-state short-term capital gains and Michigan long-term capital losses for property acquired after September 30, 1967.

Effect on Michigan Taxable Income

Based on IRC BEFORE January 1, 1987:

For carryover purposes, Taxpayer A will have a Federal long-term capital loss carryover of $214,000 ($220,000 less $6,000), and a Michigan long-term capital loss carryover of $254,000 ($260,000 less $6,000).

Based on IRC AFTER December 31, 1986:

For carryover purposes, Taxpayer A will have a Federal long-term capital loss carryover of $217,000 ($220,000 less $3,000) and a Michigan long-term capital loss carryover of $257,000 ($260,000 less $3,000).

Effect on Michigan Household Income

Taxpayer A could reduce household income by the $3,000 loss shown on the Federal Schedule D.

Example 2

Taxpayer B has both Michigan and out-of-state long-term capital losses included in his Federal Schedule D.

Effect on Michigan Taxable Income

For tax years BEFORE January 1, 1987:

For capital loss carryover purposes, Taxpayer B will have a Federal long-term capital loss carryover of $14,000 ($20,000 less $6,000), and a Michigan long-term capital loss carryover of $4,000 ($10,000 less $6,000.). No adjustment is required in the first year on the Michigan income tax return because the taxpayer has Federal and Michigan capital loss deductions in the same amount.

For tax years AFTER December 31, 1986:

For capital loss carryover purposes, Taxpayer B will have a Federal long-term capital loss carryover of $17,000 ($20,000 less $3,000) and a Michigan long-term capital loss carryover of $7,000 ($10,000 less $3,000). No adjustment is required in the first year on the Michigan income tax return because the taxpayer has Federal and Michigan capital loss deductions of the same amount.

Effect on Michigan Household Income

Taxpayer B could reduce household income by the $3,000 loss shown on Federal Schedule D.

Example 3

Taxpayer C has included in his Federal Schedule D a portion of his capital gains realized prior to October 1, 1967.

The property sold in this example was acquired on October 1, 1940, and sold on September 30, 1986. Under Michigan Income Tax Act, MCL 206.271, 63.5% of capital gains were realized prior to October 1, 1967 and may be excluded.

Effect on Michigan Taxable Income

For tax years BEFORE January 1, 1987:

Taxpayer C may reduce his Michigan taxable income by $4,000 of the capital gain included in his Federal adjusted gross income and claim a short-term capital loss deduction of $3,000 in computing his Michigan taxable income. The unused short-term capital loss of $6,050 may be carried forward to the next tax year.

For tax years AFTER December 31, 1986:

Taxpayer C may reduce his Michigan taxable income by $10,000 of the capital gain included in his Federal adjusted gross income and claim a short-term capital loss deduction of $3,000 in computing his Michigan taxable income. The unused short-term capital loss of $6,050 may be carried forward to the next tax year.

Effect on Michigan Household Income

Taxpayer C would have to include in household income the $10,000 gain shown on Federal Schedule D.

Example 4

Taxpayer D has included long-term capital gains and losses from the sale of obligations of the United States in his Federal Schedule D. The taxpayer has also included short-term capital gain from the sale of real estate located in Michigan.

Effect on Michigan Taxable Income

For tax years BEFORE January 1, 1987:

Taxpayer D must increase his Michigan taxable income by $27,200 (the difference between $32,000 and $4,800).

For tax years AFTER December 31, 1986:

Taxpayer D must increase his Michigan taxable income by $20,000 (the difference between $32,000 and $12,000).

Effect on Michigan Taxable Income

Taxpayer D would have to include the $12,000 capital gain shown on Federal Schedule D.

Example 5

Taxpayer E has short-term capital losses from the sale of corporate securities. He has incurred long-term capital gains of $50,000 from the sale of obligations of the United States.

Effect on Michigan Taxable Income

For tax years BEFORE January 1, 1987:

Taxpayer E will subtract the Federal capital gain of $7,200 and further subtract Michigan's capital loss of $3,000 from adjusted gross income. For the subsequent taxable year, the taxpayer will have a Michigan capital loss carryover deduction of $29,000.

For tax years AFTER December 31, 1986:

Taxpayer E will subtract the Federal capital gain of $18,000 and further subtract Michigan=s capital loss of $3,000 from adjusted gross income. For the subsequent taxable year, the taxpayer will have a Michigan capital loss carryover of $29,000.