Capital gains are reported on lines 13 or 14 of Form 1040, exclusively. Taxpayers with capital gains distributions may not file either Form 1040A or the new Form 1040EZ.

The bulk of capital gains received by most taxpayers are reported on line 13 of the Form 1040. If the capital gain is reported on line 13 of 1040, the Schedule D must be attached to the taxpayer's return. If the taxpayer has not submitted a copy of Schedule D with his/her income tax return, the form letter HTC-3 should be sent to request same. Here the local employee must capture the amount of capital gains shown on Schedule D at lines 7 (with any amount shown on line 6 as an operating loss carry over added back) and 17 (with any amount shown on line 15 as an operating loss carryover added back). Do not use the capital gains amount shown on line 13 of Form 1040. The reason for this recapture of the higher capital gains amount is that the federal government taxes only 40% of capital gains in order to encourage investment. The Tax Credit Program counts 100% of capital gains as gross income, regardless of the money's taxability - [Section 9-104(a)(7) COMAR 18.07.01.0-3F(1)(a)].

Capital losses can only be utilized by the applicant to the extent of offsetting other capital gains. In other words, the net figure here for Tax Credit purposes must result in a positive gain or zero. A capital lost may not be used to reduce other unrelated earned income such as wages or interest. Similarly, a capital gain from the sale of real property cannot be offset by an unrelated capital loss on the sale of stocks or securities. There is one further special limitation with regards to real property in that a capital gain on the sale of one piece of real property cannot be offset by a loss on another real property. Any questions by local employees concerning the proper amount of capital gains to be counted on individual applications should be referred to the central office coordinators.

If an applicant's sole type of capital gain is a distribution found on line 14 of the Form 1040, then he or she is not required to file Schedule D with the return. In order to obtain the 100% capital gain here, the local employee should divide the amount shown on line 14 by .40 (40 percent). For example, if the amount shown on line 14 is $200, then the total gain will be $500 after you have divided $200 by .40.