Tax question - Capital loss exceeds income -> no carryover?

[SecondCor521]

Hi all,

OK, I'm pretty familiar with how capital gains taxes work for the typical wage earning adult. In particular, I know that basically if your net losses exceed $3,000, you write off that $3K against your income and carry over the rest into future tax years.

Last year (tax/calendar year 2008), each of my three minor dependent kids had a piddling amount of qualified dividends (line 9b), larger capital losses (line 13), and nothing really else of note.

I had thought / hoped that I would write off their capital losses against their qualified dividends and then whatever was left over could be carried forward.

Looking at the tax forms, this appears not to be the case. Using example numbers on a 2008 1040, I did this:

9a - $100
9b - $100
13 - ($1,000)
22, 37, 38 - ($900)
40 - $900
41 - ($1,800)
42 and following - $0

So it looks like if you have capital losses that exceed your "income", that extra just gets lost and not used because of the phrase on line 43: "If line 42 is more than line 41, enter -0-"

On the one hand, this simplifies my life if I don't have to keep track of what I thought were carryover losses. On the other hand, this stinks that I didn't do very good tax planning in this situation.

Am I interpreting this correctly?

2Cor521

 

[Gone4Good]

Am I interpreting this correctly?

I don't believe so. I think you're entitled to carry over those losses.

After a very quick read of pub 550, it looks like you have to fill out Worksheet 4-1. Capital Loss Carryover Worksheet

Good luck.

 

[Danmar]

In Canada can only claim cap losses against cap gains. Can go back 3 years and forward indefinately. Cap gains included in income at 50%.

 

[SecondCor521]

I don't believe so. I think you're entitled to carry over those losses.

After a very quick read of pub 550, it looks like you have to fill out Worksheet 4-1. Capital Loss Carryover Worksheet

Good luck.

I took a look at your link and you appear to be spot on. Thank you!

I don't live in Canada, so the other reply doesn't apply.

2Cor521

 

[Nords]

So it looks like if you have capital losses that exceed your "income", that extra just gets lost and not used because of the phrase on line 43: "If line 42 is more than line 41, enter -0-"
Am I interpreting this correctly?

Nope. On federal returns, cap losses are taken against cap gains until all the cap gains (both short & long) are gone. Then another $3000 of cap losses can be deducted from income (or until income is all gone, if income is under $3000).

The rest of the cap losses are carried forward to future tax years' cap gains and $3000 of income. Individuals can carry them forward for life but I think mutual funds have to use up theircap losses within a decade.

 

[SecondCor521]

OK, so as long as I'm getting personal service...

My kids didn't have any income that needed to be reported in 2009. Do I need to file an informational return to carry this loss forward into 2011, 2012, etc., or can I just complete the worksheets.

Lazily yours,

2Cor521

 

[kaneohe]

I don't have any direct experience but I think I've read that you can lose none, some, or all of your 3K annual loss allowance depending on levels of income relative to the exemption/deduction levels. At the very low income levels, it may well be that you lose nothing but that might not be true at higher income levels.

 

[chemist]

I don't have any direct experience but I think I've read that you can lose none, some, or all of your 3K annual loss allowance depending on levels of income relative to the exemption/deduction levels. At the very low income levels, it may well be that you lose nothing but that might not be true at higher income levels.

This is not true as I have very high income (>$500K in some years) and I carry forward C/L. And I have a CPA doing my taxes.

 

[kaneohe]

This is not true as I have very high income (>$500K in some years) and I carry forward C/L. And I have a CPA doing my taxes.

sorry for leading you astray.....I meant higher income levels than OP was talking about (which were very low)......so relatively higher (than OP) was talking about, not absolutely higher that you are referring too. I'm talking about when AGI is in the neighborhood of deductions plus exemptions so taxable income is around 0. Of course, at your higher income level, you always have income to absorb the 3K loss. At marginal income levels, that isn't true which raises the question of what happens to the rest of the 3K annual loss if you don't.
Could have been clearer in the writing.......perhaps "somewhat higher" income levels.

 

[Nords]

The Dollar Stretcher newsletter and Bankrate.com have some interesting links on cap gains rates:
A look at the many capital gains rates

No capital gains taxes due for some investors