Stock sales and child-tax credits

When can a loss be declared on trading shares and how a new birth affects the child-tax credit; Baltimoresun.com's tax experts answer your questions

By Todd Beamon | Baltimoresun.com Staff

March 17, 2004

Each Wednesday through April 21, baltimoresun.com's tax experts will answer your questions this tax-filing season.

Our experts are Jim Dupree of the Maryland office of the Internal Revenue Service in Baltimore and, this week, Gregory S. Horning of Stout, Causey & Horning in Hunt Valley.

To be included next week, please use the form at the right side of this page to submit your questions.

In 2003, my mother personally sold me about 2,000 shares of stock in a computer company listed on the New York Stock Exchange. She subsequently transferred the shares without redeeming them to a discount brokerage account that I had opened up.

Does she have to report anything on her taxes for the 2003 tax year? Can she claim a loss (of up to $3,000 per year, as I understand), since she originally bought the shares for more than they were worth when she made the private sale to me?

Mark, Kingsville

Dupree: You cannot deduct the loss on the sale of property, other than a distribution in the complete liquidation of a corporation, if the transaction is directly or indirectly between you and only these members of your family -- brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents and grandparents) and lineal descendants, which include your children and grandchildren.

You may not deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged.

Horning: Normally, when a taxpayer sells stock, he or she receives Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. This information also is reported to the Internal Revenue Service.

Since this was a private sale, no Form 1099-B was generated. As far as the IRS is concerned, there was no sale. Without a paper trail, it would be very difficult to prove that this was an arms-length transaction.

Even if you could prove that the sale occurred, your mother will not be able to deduct the loss. No deduction is allowed for losses realized on the sale or exchange of property between related parties. If you, as purchaser, later sell the stock at a gain, you may reduce your gain by the amount of loss your mother could not deduct.

Also, if you purchased the shares from your mother for less than their fair-market value, the IRS could treat it as a gift from your mother to you. Depending upon the amount of the difference, your mother may be responsible for gift taxes on the transaction. Your cost basis for determining gain or loss on the stock sale in this situation then would be subject to a separate set of rules applicable to gifted property.

Since this stock is publicly traded, ideally, your mother would have sold the stock on the open market and you would have purchased it on the open market at the same time (and presumably for the same price). This would have allowed your mother to recognize the loss on the sale and still put you in the same position.

We had our first child in November. How does the extra child-tax credit work for us? Are we able to take an additional $1,000 credit since our baby was born after the refunds were paid out?

Mark, Pasadena

Dupree: Congratulations! Since you were ineligible for the up to $400 for last summer's 2003 Advance Child-Tax Credit refund, because it was based on your 2002 eligibility, then you may be eligible for the $1,000 Child -Tax Credit.

However, you must meet the annual income limit -- $110,000 or less if married and filing jointly. The credit you receive also would be applied against any tax owed on your 2003 tax return. If your tax is less than the credit or zero, you may qualify for the additional child tax-credit, which may give you a refund even if you do not owe taxes this year.

Please use Form 8812 to compute any additional child-tax credit. In addition, Publication 972, "Child Tax Credit," has all the worksheets necessary to help you determine whether you qualify for either credit.

Horning: The maximum child-tax credit you will be allowed is $1,000. Last year's Jobs and Growth Tax Relief Reconciliation Act increased the credit from $600 to $1,000. About $400 of the credit was prepaid to eligible families beginning in July 2003.

Taxpayers who had not timely filed their 2002 returns and taxpayers with children born in 2003 may claim the entire $1,000 credit on their 2003 returns if they qualify for it.