Capital gain tax questions

[farmerEd]

Question for you tax savy folks.....

1. What happens when you are carrying forward a short-term loss, and then the next year you have some short-term gains and some long-term gains?

For example, if you have a $100,000 carryforward ST loss and then you make $20,000 in st gains and $30K in LT gains.

The $20K ST gain obviously is offset by the ST loss, but can you offset the LT gain with the ST loss?

 

[brewer12345]

Usually, what you are required to do is offset the LT gain with any loss carryover, then offset any ST gains with any remaining loss carryovers. This makes things come out in the gummint's favor.

So yes, you can offset LT gains with ST losses.

 

[farmerEd]

OK, another question. I knew I had two but couldn't remember the second....

I am still carrying forward some st losses from prior years...this year I had a st gain that used up about 15% of my losses...so I applied the st loss to the st gain and carried the rest of the loss forward...BUT, even if I didn't apply the loss to the gain, my tax liability would still have been zero (high property taxes and 4 kids sets the threshold pretty high), so in otherwords, I would have prefered to carry the FULL loss forward, and not applied any of it to my gain...is that possible? I couldn't find anyway to do it in turbo-tax, so I went ahead and let it apply the loss to the gain.

Is it possible to not use a loss to offset a gain? in my situtation, I would have much prefered to carry the loss to a future year when it may have done me some good....?

 

[malakito]

Is it possible to not use a loss to offset a gain?

Nope. At least, I'm pretty sure the answer is "nope".

malakito

 

[Nords]

FarmerEd,

This sounds like a great opportunity to convert a portion of a conventional IRA to a Roth IRA. Cap losses may be painful, but they sure can hide a lot of other gains.

I suspect that storing cap losses in a "cookie jar" falls under the heading of "too good to be true". Maybe you could harvest some cap gains in anticipation of the stock market's post-election meltdown when we realize that we've elected a real loser. (Take your pick, but either way the "loser" outcome is unchanged.)

But your question is perfect for the financial managers that post at FundAlarm-- http://www.fundalarm.com/wwwboard/wwwboard.html . Bob C, in particular, might have an answer with a tax-code reference...

 

[bongo2]

I'm no tax expert, but I did muddle through my own taxes last year, and from what I could figure out first you apply ST loss to ST gain, and LT loss to LT gain. Then, if there are any gains and losses leftover you apply ST losses to LT gains, or LT losses to ST gains. You cannot chose to hold losses for future years.

 

[cc]

One good thing is that if you don't have gains to offset, the caryforward can offset $3K of ordinary income - even if the original loss was long-term...

 

[cute fuzzy bunny]

This sounds like a great opportunity to convert a portion of a conventional IRA to a Roth IRA. Cap losses may be painful, but they sure can hide a lot of other gains.

Capital losses can be used to offset a Roth conversion?

Are you sure?

Since I have a good pile of capital losses, this would make me very, very happy...

Let me know what you know...i'm off to research...

 

[cute fuzzy bunny]

Unfortunately no...its treated as income, not as a gain

 

[retire@40]

Question for you tax savy folks.....

1.  What happens when you are carrying forward a short-term loss, and then the next year you have some short-term gains and some long-term gains?

For example, if you have a $100,000 carryforward ST loss and then you make $20,000 in st gains and $30K in LT gains.

The $20K ST gain obviously is offset by the ST loss, but can you offset the LT gain with the ST loss?

Yes, you can offset LT gain with ST loss.

 

[retire@40]

OK, another question. I knew I had two but couldn't remember the second....

I am still carrying forward some st losses from prior years...this year I had a st gain that used up about 15% of my losses...so I applied the st loss to the st gain and carried the rest of the loss forward...BUT, even if I didn't apply the loss to the gain, my tax liability would still have been zero (high property taxes and 4 kids sets the threshold pretty high), so in otherwords, I would have prefered to carry the FULL loss forward, and not applied any of it to my gain...is that possible? I couldn't find anyway to do it in turbo-tax, so I went ahead and let it apply the loss to the gain.

Is it possible to not use a loss to offset a gain? in my situtation, I would have much prefered to carry the loss to a future year when it may have done me some good....?

Yes, it's possible to be in a situation where the full loss is carried over into next year. If you don't know how this works, I would suggest you have your tax return prepared by a local CPA.

 

[retire@40]

Unfortunately no...its treated as income, not as a gain

TH, I'm confused. Are you saying you can't offset taxable income from a conversion to a Roth IRA with capital losses?

 

[cute fuzzy bunny]

That appears to be the case, except for the $3000 limit for losses applied to income each year. Every document I read referred to the conversion as being treated as ordinary income, not as any kind of capital gain.

Just to recap on the gains/losses rules (as I understand them):

Any ST losses in the current year or carried over are applied first to ST gains.

Any LT losses in the current year or carried over are applied first to LT gains.

Once that is complete, any remaining ST or LT losses can be used to offset the other.

After that, a max of $3000 is applied to ordinary income.

I dont believe you have the option to not apply losses when you have them. At least turbotax gives you no choice when it calculates. I havent looked into that in detail though.

Example:

You have 10k in ST losses and 5k in LT losses.

In the current tax year you have $15k in ST gains and no LT gains.

You apply the 10k in ST losses to the ST gains, and then you may apply the 5k in LT losses to the ST gains.

Example 2:

You have 10k in ST losses and 5k in LT losses.

In the current year you have 5k in ST gains and 10k in LT gains.

You apply 5k of st losses to the 5k in st gains, 5k of lt losses towards the 10k in lt gains. This leaves you with 5k in st losses and 5k in lt gains. You apply the 5k in st losses to the 5k in lt gains.

 

[retire@40]

That appears to be the case, except for the $3000 limit for losses applied to income each year.

Ok, so you can offset a conversion of at least $3000 taxable a year with capital losses.

 

[cute fuzzy bunny]

Yep.

I was getting excited about it because I've got six figures in losses and could have converted almost a third of my ira into a roth in one year if you could use capital losses to offset the conversion.

No such luck...it appears.

 

[Cut-Throat]

This is not an answer to the post at all, but only a comment.

Why do you guys even bother trying to figure out your own taxes? - Do you fill your own teeth or do you go to a Dentist?

I pay my accountant about $150 a year to answer my questions and file my returns every year. He has saved me more money than his fees over the last 20 years. Plus I don't have to think about it and can go fishing.

Think about it. Reading about and studing taxes is work and you're amateurs. Plus the laws change every year and who wants to keep up with that?

You're retired ! Would'nt you rather be sitting on a beach drinking Mai Tais or looking at my Fishing Pictures?

 

[retire@40]

Yep.

I was getting excited about it because I've got six figures in losses.

Ahhhh, now this explains why you are so pessimistic of the stock market. I hope you can recover some of those losses with some tax benefits at least.

 

[retire@40]

This is not an answer to the post at all, but only a comment.

Why do you guys even bother trying to figure out your own taxes?  - Do you fill your own teeth or do you go to a Dentist?

I pay my accountant about $150 a year to answer my questions and file my returns every year. He has saved me more money than his fees over the last 20 years. Plus I don't have to think about it and can go fishing.

Think about it. Reading about and studing taxes is work and you're amateurs. Plus the laws change every year and who wants to keep up with that?

You're retired ! Would'nt you rather be sitting on a beach drinking Mai Tais or looking at my Fishing Pictures?

I agree 100%. People here are struggling to figure out what it takes a CPA years to understand. Put the tax preparation fees in your budgets and do something more fun with your time.

 

[cute fuzzy bunny]

Eh, I got out in 1/2000 and was trying to buy dips when the nasdaq hit 3000 and then when it hit 2000. Obviously a mistake in retrospect.

The good news is the loss stockpile enables me to avoid paying any taxes at all for a long time. Right now I'm enjoying the dividend tax break and saving the capital losses for later.

Cut-Throat...I do my own taxes for the same reason I change my own oil. I know the job is done right and I know its been done thoroughly. I can employ a piece of software that I get for free that is updated every day with the latest in tax law. Knowing the implications of taxable events helps me make better decisions in investing. I can look at things 5 different ways and see the effects.

I discovered 5 years ago that jiffy-lube hadnt greased the front end on my truck for 5 years running. I was wondering why the steering was a little stiff. When I called them, they said their computer said my truck had no grease fittings. I suppose looking at the front end while waiting for the oil to drain and seeing the 5 obvious zerks was a little too complicated for them.

Further, I have a friend whose ex-husband does taxes. Prides himself on pushing every line and dipping into every interpretable deduction. Looks forward to audits to try and prove his skills. I'd rather pay a little extra in tax, follow the rules, and avoid that scenario. I also had my taxes done by a H&R Block about 15 years ago. When I got home and reviewed the paperwork I found a couple of deductions they hadnt taken, and a mistake on one calculation series.

Oil filters are cheap, so is turbotax...

But whatever works for you, do it!

 

[cute fuzzy bunny]

I agree 100%. People here are struggling to figure out what it takes a CPA years to understand. Put the tax preparation fees in your budgets and do something more fun with your time.

Silly question for y'all. Why do we read books, go through a lot of trouble and invest our own money in index funds when there are perfectly good financial planners willing to offload all that hard work for just a percent or two of our money every year. Seems cheap to avoid learning all that investing stuff...

 

[retire@40]

I also had my taxes done by a H&R Block about 15 years ago.  When I got home and reviewed the paperwork I found a couple of deductions they hadnt taken, and a mistake on one calculation series.

ROFL!!! Expecting good tax service from H&R Block is like expecting McDonalds to serve you filet mignon medium rare.

Not to say CPAs don't make mistakes, but you generally get a much higher standard and quality product from a CPA.

I agree that you should understand the general points when it comes to taxes and I commend you for being a do-it-yourselfer, but don't think that turbo tax makes you an expert in taxation and accounting. For simple returns it's a great product and maybe when you hit the print button it has helped you arrive at your most efficient tax. But unless you REALLY understand the nature of the tax system which changes with the wind, I don't believe any tax product can be a substitute for human knowledge and analysis.

 

[Cut-Throat]

Silly question for y'all.  Why do we read books, go through a lot of trouble and invest our own money in index funds when there are perfectly good financial planners willing to offload all that hard work for just a percent or two of our money every year.  Seems cheap to avoid learning all that investing stuff...  

If the statistics for Financial Planners were as good as Tax Preparers, I'd employ one immediately. They aren't!

Index funds are also easy and 90% of Financial Planners can't beat them.

I would not go to HR Block, I use the same CPA as I have for over 20 years. He's good! Better than me!

 

[unclemick]

A dangerous statement TH - you know how many number crunchers post here - I can almost hear the computers humming - lets see - tax prep fees - compounded over thirty years of retirement at X rates of return.

Scott Burns has mined this well many a time with various examples of trusty long term compounding - Bogle usually sticks with fund expenses.

Boy oh boy - anybody run thirty years do your own taxes and invest the money saved at 8% or ?

Seriously - playing with long term compounding effects - both positive and negative is a worthwhile exercise - IMHO.

 

[retire@40]

If the statistics for Financial Planners were as good as Tax Preparers, I'd employ one immediately. They aren't!

Index funds are also easy and 90% of Financial Planners can't beat them.

I would not go to HR Block, I use the same CPA as I have for over 20 years. He's good! Better than me!

Again, I agree 100%. Financial planners are great for those who know nothing and don't care about learning anything about investments. Financial planning involves concepts that don't change (like the future value of money), make more common sense, and is generally more "fun" than taxation and tax compliance. What's more fun, figuring out how much you will have in 10 years if you invest $1000 a month at 6% or trying to figure out how to apply short-term losses against long-term gains, applying wash-sale rules, and calculating net operating losses?

 

[sgeeeee]

If the statistics for Financial Planners were as good as Tax Preparers, I'd employ one immediately. They aren't!

. . .

What tax preparer statistics are you referring to? Every year I read at least a couple of articles where a journalist takes a fairly standard set of tax records to a half dozen different tax preparers and ends up with 6 very different answers -- none of which is optimum and usually with about half of them being wrong. Everything I've read and seen on tax preparers indicates that as a group they are bumbling fools.

Tax law just isn't that complex -- even though my tax situation is far more complex than the typical filer. Over the years my DW and I have both worked -- often at multiple jobs and sometimes in multiple states. Between the two of us, we've owned a cattle ranch, a publishing company, a consulting firm, an education company and are both published authors with royalty earnings. I've had as many as 5 W-2s and 4 schedule C forms in a single year. It takes a few days each year to understand the updates and complete the forms. I've spoken with tax preparers about doing my taxes for me. They either don't want the business at all, or they want a small fortune for the work. I can't imagine how someone could take my records at the end of the year and understand my tax situation and file my taxes more effectively than I could.