Can Short/Long Term Losses Be Deducted From Dividend Income ? *ACA Related*

[ownyourfuture]

I'm in the process of signing up for health care insurance under the ACA for the first time. (My cobra runs out on December 7th)

My pension income totals $36,696.00 per year.
As of today my total ’taxable’ income at Fidelity is $10,681.10
Of that total $10,578.50 are ordinary dividends, $59.76 capital gains distributions, $6.98 in interest & $35.86 in tax exempt income.

Of the $10,578.50 in dividends, $7,626.70 are 'qualified'
Toal income = $47,377.10

According to the agent helping me to get this set up, this puts me dangerously close to the income threshold relating to subsidies.

In that same account I have capital losses of $5,485.92
$3,950.97 short-term & $1534.95 long-term.

Can I deduct $3000.00 of those capital losses from my dividend income, or is that only applicable towards short & long term losses on stocks’, etf’s , funds etc ?

I researched before posting & found a related article at the Motley Fool
Can Capital Gains Offset Dividends? -- The Motley Fool

The full title of the article is:

Can Capital Gains Offset Dividends?
Capital gains and dividends are both ways of making money from an investment so, for tax purposes, they can't offset each other.

According to that, the answer to my question would be no.
However, later in the article I saw this:

Offsetting capital gains with capital losses
Capital gains and dividends can't offset one another because they're both a way of making money on an investment. However, capital losses can be used to offset gains. When you buy a stock and then sell it for a price that's lower than what you paid, it's considered a capital loss.

Any time you lose money on an investment, that loss can be used to offset money you make on an investment. Capital losses are initially used to offset gains of the same nature, which means short-term losses are first used to offset short-term gains, and long-term losses are first used to offset long-term gains. However, either type of net loss can then be used to offset the other type of gain.

Let's say you have $2,000 in short-term capital losses, $1,000 in short-term capital gains, and $1,500 in long-term capital gains. You'd first use that short-term loss to essentially eliminate that short-term gain for tax purposes. Then, you'd take the remaining $1,000 in losses and use it to cancel out $1,000 in long-term capital gains, leaving you with just $500 in long-term gains to pay taxes on. Furthermore, if you're left with a net capital loss for the year after offsetting all capital gains, you can use up to $3,000 of that loss to offset your regular taxable income, including income you receive from dividends.

If I understand that last sentence, since I'm left with a net capital loss for the year after offsetting all capital gains, I should be able to use up to $3000.00 of that loss to offset my dividend income ?

I'm hoping someone here at ERF has dealt with this situation before, & if so, be nice enough to let me know if I'm right/wrong.

Thanks in advance

 

[Lake161]

This link shows the MAGI calculations for the ACA.

http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

You will see that capital gains (loss) are part of the calculations.

 

[pb4uski]

Are these capital losses that you are referring to realized or unrealized?

If they are net realized losses, then up to $3,000/year can be used to offset ordinary income.

However, you need to be careful... I presume that you are signing up for 2017 ACA subsidies... if so, those will be based on estimates that you are making today of your 2017 MAGI so you would need to adjust your pension income if it is a COLAed pension and make estimates of your interest and dividends for 2017. Even if the losses are realized, $3,000 would be used in 2016 so at most only $2,486 would carryover to 2017.

There is a mechanism that trues up the subsidies that you actually receive in 2017 with the subsidies that you should have received based on your actual 2017 income that occurs when you prepare your 2017 tax return in 2018. You will owe the difference if you receive more than you should have and get a larger refund if you received less than you should have.

If your actual 2017 income is a little bit higher and you exceed the 400% FPL threshold you will owe a lot... that is a peril for people who are close to the limit... it is know as the "cliff". Also see Advanced Tax Credit Repayment Limits - Obamacare Facts

 

[SecondCor521]

The short answer is yes, you can.

To be perfectly clear, you would have to sell whatever securities you have with the capital loss before the end of this year in order to reduce your income. It is not clear from your post whether you have done this or not. Selling the securities to affect your income is called "realizing" the gain or loss.

See the instructions for Schedule D and line 13 of form 1040. Your short term gains and losses will go in part 1 and your long term gains and losses will go in part 2.

The short term gains and losses get combined on line 7. The long term gains and losses get combined on line 15. Then the two get combined together in part 3 on line 16.

The $3000 limit in the article you cited is enforced on line 21. If you have a total net loss of more than $3,000, you can carry forward the leftover to future tax years - see lines 6 and 14 of Schedule D.

Since you have qualified dividends, you should make sure that you complete the worksheet when you get to line 44 of your tax return (or use tax software and put the numbers in the right place). Doing so will end up lowering your tax bill versus if you just use the tax tables.

If you want to get fancy, you can decide to sell only part of your securities, and you can pick and choose which shares so you can dial in the size and nature (short-term vs. long-term) of your losses.

Ultimately, the capital loss should show up on line 13 of your 1040 as a negative number, and you will see it offsetting your dividends from line 9 of your 1040. These two numbers will combine on line 22 and end up affecting line 37, which is your AGI, which is essentially what is used for ACA purposes to determine your subsidies.

Another thought - if you have extra cash, you can make a traditional IRA contribution to lower your AGI instead. This has a few advantages:

1. You may qualify for the retirement savings tax credit. It is hard to qualify for, but you might.
2. You can make the IRA contribution any time until you file next year. So you could wait until March, get all your tax return done, and then see where you fall with respect to the ACA subsidy limit and make the exact contribution necessary to get to that level.

Of course, you can only contribute up to a certain amount, so if your AGI is much too high, you'll be out of luck.

And now that I've written all this...the most important thing to realize is that your ACA tax credit and income tax returns go hand-in-hand. So the subsidy you are applying for now is presumably for 2017 and will be based on your 2017 income, not your 2016 income. So you don't want to do any of the above tax planning moves this year; you'll want to do them next year.

What happens is that you apply for ACA credits based on your estimated 2017 income, and some government agency decides if you're estimate is reasonable. If so, you get the credits paid throughout next year. Then in the spring of 2018, you'll do your tax return for 2017 to determine your actual 2017 income. Based on how things shake out with your 2017 estimated versus actual income, your ACA subsidy will have been too high or too low, and your tax bill/refund will increase/decrease appropriately.

Hope that helps.

 

[ownyourfuture]

ATTN: pb4uski
Thanks a million for the reply!

Are these capital losses that you are referring to realized or unrealized?

They are realized.

Total Realized Gain/Loss
-$5,485.92

Net Short-Term
Details -$3,950.97
Net Long-Term
Details-$1,534.95

However, you need to be careful... I presume that you are signing up for 2017 ACA subsidies.

Since my COBRA expires on December 6th, I have to sign up for one month of 2016 coverage. But yes, I'm also signing up for 2017 coverage.


If so, those will be based on estimates that you are making today of your 2017 MAGI so you would need to adjust your pension income if it is a COLAed pension and make estimates of your interest and dividends for 2017. Even if the losses are realized, $3,000 would be used in 2016 so at most only $2,486 would carryover to 2017.

Understood. My pension does not include COLA, and I've already started making slight adjustments to my portfolio to assure my income will stay below the subsidy caps in 2017.

 

[ownyourfuture]

The short answer is yes, you can.

To be perfectly clear, you would have to sell whatever securities you have with the capital loss before the end of this year in order to reduce your income. It is not clear from your post whether you have done this or not. Selling the securities to affect your income is called "realizing" the gain or loss.

See the instructions for Schedule D and line 13 of form 1040. Your short term gains and losses will go in part 1 and your long term gains and losses will go in part 2.

The short term gains and losses get combined on line 7. The long term gains and losses get combined on line 15. Then the two get combined together in part 3 on line 16.

The $3000 limit in the article you cited is enforced on line 21. If you have a total net loss of more than $3,000, you can carry forward the leftover to future tax years - see lines 6 and 14 of Schedule D.

Since you have qualified dividends, you should make sure that you complete the worksheet when you get to line 44 of your tax return (or use tax software and put the numbers in the right place). Doing so will end up lowering your tax bill versus if you just use the tax tables.

If you want to get fancy, you can decide to sell only part of your securities, and you can pick and choose which shares so you can dial in the size and nature (short-term vs. long-term) of your losses.

Ultimately, the capital loss should show up on line 13 of your 1040 as a negative number, and you will see it offsetting your dividends from line 9 of your 1040. These two numbers will combine on line 22 and end up affecting line 37, which is your AGI, which is essentially what is used for ACA purposes to determine your subsidies.

Another thought - if you have extra cash, you can make a traditional IRA contribution to lower your AGI instead. This has a few advantages:

1. You may qualify for the retirement savings tax credit. It is hard to qualify for, but you might.
2. You can make the IRA contribution any time until you file next year. So you could wait until March, get all your tax return done, and then see where you fall with respect to the ACA subsidy limit and make the exact contribution necessary to get to that level.

Of course, you can only contribute up to a certain amount, so if your AGI is much too high, you'll be out of luck.

And now that I've written all this...the most important thing to realize is that your ACA tax credit and income tax returns go hand-in-hand. So the subsidy you are applying for now is presumably for 2017 and will be based on your 2017 income, not your 2016 income. So you don't want to do any of the above tax planning moves this year; you'll want to do them next year.

What happens is that you apply for ACA credits based on your estimated 2017 income, and some government agency decides if you're estimate is reasonable. If so, you get the credits paid throughout next year. Then in the spring of 2018, you'll do your tax return for 2017 to determine your actual 2017 income. Based on how things shake out with your 2017 estimated versus actual income, your ACA subsidy will have been too high or too low, and your tax bill/refund will increase/decrease appropriately.

Hope that helps.

It absolutely helps. Great info.
Thanks for the reply!

 

[Texas Proud]

I will just say that the question is posed incorrectly....

No, you cannot take cap losses and deduct them from dividends to have less dividends... that answers the question....


BUT, you can net cap losses with your other income, including dividends, for a net income that is used to determine if you get a subsidy...

BTW, you can also take a real estate loss against income if you happen to be renting out someplace...

 

[ownyourfuture]

I will just say that the question is posed incorrectly....

No, you cannot take cap losses and deduct them from dividends to have less dividends... that answers the question....


BUT, you can net cap losses with your other income, including dividends, for a net income that is used to determine if you get a subsidy...

BTW, you can also take a real estate loss against income if you happen to be renting out someplace...

I mean no disrespect Texas Proud, but up until you posted, I was feeling comfortable with the situation.

If you're only reason for posting was to tell me that I didn't articulate the question perfectly, I guess that's fine by me.

Sorry if I'm missing something.
PS: I don't rent, or own any rental property.

 

[SecondCor521]

I think Texas Proud was just being pedantic (which in my opinion is not a bad thing).

He's just saying that, technically speaking, your capital loss doesn't mean that your dividends are any less, but practically speaking, your capital loss does give you the intended effect of lowering your income for the subsidies.

I think, anyway

 

[Texas Proud]

I mean no disrespect Texas Proud, but up until you posted, I was feeling comfortable with the situation.

If you're only reason for posting was to tell me that I didn't articulate the question perfectly, I guess that's fine by me.

Sorry if I'm missing something.
PS: I don't rent, or own any rental property.

I only said that because some people might read the answers to your question and then deduct cap loss from dividends, which is wrong... so I posted what I THINK you were trying to ask...

I think Texas Proud was just being pedantic (which in my opinion is not a bad thing).

He's just saying that, technically speaking, your capital loss doesn't mean that your dividends are any less, but practically speaking, your capital loss does give you the intended effect of lowering your income for the subsidies.

I think, anyway

Yes, this is correct... which is why I said the net income includes the cap loss...



To be more clear.... yes, you can use up to $3,000 of cap losses to reduce your MAGI for ACA purposes.... (but you cannot use $3,000 of cap losses to reduce your dividend income as they are considered separate sources of income)....

 

[Sunset]

...
He's just saying that, technically speaking, your capital loss doesn't mean that your dividends are any less, but practically speaking, your capital loss does give you the intended effect of lowering your income for the subsidies.

.....

You think correctly..

The unused capital loses left over after off-setting capital gains can be used to deduct $3,000 worth of other income, and any more remaining can be carried forward to use the next year(s).

 

[kaneohe]

I mean no disrespect Texas Proud, but up until you posted, I was feeling comfortable with the situation.

If you're only reason for posting was to tell me that I didn't articulate the question perfectly, I guess that's fine by me.

Sorry if I'm missing something.
....................

Texas Proud is correct. If your only concern is looking at the income for ACA,you could think about it your way and get the right answer for your purposes. However Texas Proud's method is more correct because it will
also get you the right answer if you worry about taxation. You can combine
QDIV and CGs if CG> 0. However you will get the wrong answer if CG < 0
and you combine QDIV and the capital loss. Probably better to have the right concept that will serve you for all situations.

btw...........you wouldn't be the only one have this misconception.
HR Block has a tax calculator that works well for most situations. However
it seems to have a bug when there is capital loss and QDIV.

 

[ownyourfuture]

Thanks for all the replies.
My question was answered, & I'll sleep well tonight.

You can't put a price on that

 

[reubenray]

My losses have been counted toward my income. I have received some money back each year from IRS due to this. There is no way I can estimate exactly what I will be getting each year. Part of my money is from SS and the other part is dividends from my retirement funds. I try to average out what my dividends will be per month.

 

[RE2Boys]

My losses have been counted toward my income. I have received some money back each year from IRS due to this. There is no way I can estimate exactly what I will be getting each year. Part of my money is from SS and the other part is dividends from my retirement funds. I try to average out what my dividends will be per month.

??

There is no tax on dividends from investments in a retirement account (401k, T-IRA, Roth IRA) until you withdraw from the retirement account.