The following are answers to frequently asked questions. Keep in mind that I am not an accountant or attorney and the answers are general in nature. If you have a particular legal or tax situation, consult with a competent professional.
How do short-term and long-term capital gains offset each other and ordinary income?
Typically, it is best to offset short-term gains (for holdings less than 12 months) with losses. That is because short-term gains are taxed at ordinary income tax rates, as high as 39.6%. On the other hand, long-term capital gains are taxed at a maximum 20%.
The rules are:
(1) Short-term losses are first matched with short-term gains, dollar for dollar.
(2) Long-term losses in excess of long-term gains may also be used to offset short-term gains.
(3) Net capital losses of up to $3,000 can be used to offset ordinary income, with additional long-term capital losses carried over and used in future years.
How long should tax records and receipts be kept?
Barbara Weltman, attorney, has answered that question below.
The IRS says taxpayers must keep old tax returns and other tax records for as long as they may be needed for the administration of any provision of the Tax Code.
Generally, this means you must keep records that support the items shown on your return until the statute of limitations for that return runs out.
MAJOR TIME LIMITATION PERIODS
Normal audit limit: 3 years
Audit limit if gross income is understated by 25% or more: 6 years
Time limit for deducting worthless securities/bad debts: 7 years
Audit limit if no return is filed: no limit
Audit limit if fraud is committed: no limit
Important: All tax records for properties such as homes, businesses, and investments should be held until you dispose of them and report the disposition on your tax return, in addition to the time limits above.
Trap: The IRS can always “create” a situation in which it says no time limit applies to your return by alleging that you never filed or that you committed fraud on your return. You’ll need copies of your return to refute such an allegation — so the safest practice is to keep your returns forever.
This is from the IRS:
Must a partnership or corporation file a tax form even though it had no income for the year?
A domestic partnership must file an income tax form unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes.
A domestic corporation must file an income tax form whether it has taxable income or not.