Capital Loss

[aaronc879]

The only investment I had in taxable investments went bankrupt recently. The cost basis on the remaining shares I had was worth about $33K. Those shares weren't sold, they were just discarded and my account is empty. Does that count as a capital loss even though the shares weren't sold? Follow up question, is it true that I can't hold back from using a capital loss for one year without forfeiting them? I would like to not use any capital loss or at least not use the full $3000 this year since it seems likely my income won't be high enough to make the minimum for ACA subsidies if I claim the capital loss. I thought I could just not use it one year or some years and use it for other years but apparently if I don't use all i'm eligible for in each year then I forfeit all of it, correct? What happens if I estimated a $15,000 income for ACA and as a result have a plan with $0 monthly premium but then I end up making too little to qualify for ACA? Do I have to pay back some of the subsidy? Do I get forced onto Medicaid next year?

 

[SecondCor521]

The only investment I had in taxable investments went bankrupt recently. The cost basis on the remaining shares I had was worth about $33K. Those shares weren't sold, they were just discarded and my account is empty. [1] Does that count as a capital loss even though the shares weren't sold? [2] Follow up question, is it true that I can't hold back from using a capital loss for one year without forfeiting them? I would like to not use any capital loss or at least not use the full $3000 this year since it seems likely my income won't be high enough to make the minimum for ACA subsidies if I claim the capital loss. [3] I thought I could just not use it one year or some years and use it for other years but apparently if I don't use all i'm eligible for in each year then I forfeit all of it, correct? [4] What happens if I estimated a $15,000 income for ACA and as a result have a plan with $0 monthly premium but then I end up making too little to qualify for ACA? [5] Do I have to pay back some of the subsidy? [6] Do I get forced onto Medicaid next year?

[Numbers added for reference.]

1. Yes. You have a $33K capital loss.

2. Essentially. First, the law does not give you the option to choose to defer the capital loss to a future year. You must report it on your taxes this year since the loss occurred this year.

If you have no realized capital gains this year (which it sounds like you don't), then your tax return will show a $33K capital loss, of which $3K will offset your other income and $30K will be carried over next year.

For the next decade or so, this process will repeat, eating away at that capital loss until (a) it's all used up, (b) you die, or (c) you have capital gains to offset the loss.

(I say "essentially" above because the way the law is written, you wouldn't forfeit them, you'd just be filing your taxes wrong.)

3. No. As above, you can't pick and choose when to use the capital loss. You have to report it and use as much of it as the calculations on the tax form (Schedule D) say each year.

And again, you wouldn't forfeit it, you'd just be filing your taxes wrong and subjecting yourself to IRS letters, fines, penalties, etc. Note that the broker who held your stock for you will probably report this taxable event to you and the IRS with a 1099-B in January 2022. If you don't report it or report it wrong, the IRS computers will be able to automatically see that and I think you'll get a correction letter of some kind.

4. If you're already on the ACA now and worried about your 2021 coverage, you're probably OK for this year. See "Household income below 100% of the federal poverty line." on page 8 of https://www.irs.gov/pub/irs-prior/i8962--2020.pdf. This fall if you're signing up for 2022 coverage, to be completely honest and above board, you should take into account the $3K capital loss carry forward in your income estimate. If possible, you might be able to increase your other income to compensate - do more Roth conversions maybe, or do some more medical studies or whatever. Some people will estimate high just to get coverage, but there is risk associated with this. From the same area in the Form 8962 instructions, it says you can't claim the subsidy if "You, with intentional or reckless disregard for the facts, provided incorrect information to a Marketplace for the year of coverage."

5. Probably not. See the link and description in answer #4 above.

6. If you estimate your income too low this fall, you would be forced off ACA and be offered Medicaid. Technically you could decline Medicaid and just be uninsured.

 

[aaronc879]

[Numbers added for reference.]

1. Yes. You have a $33K capital loss.

2. Essentially. First, the law does not give you the option to choose to defer the capital loss to a future year. You must report it on your taxes this year since the loss occurred this year.

If you have no realized capital gains this year (which it sounds like you don't), then your tax return will show a $33K capital loss, of which $3K will offset your other income and $30K will be carried over next year.

For the next decade or so, this process will repeat, eating away at that capital loss until (a) it's all used up, (b) you die, or (c) you have capital gains to offset the loss.

(I say "essentially" above because the way the law is written, you wouldn't forfeit them, you'd just be filing your taxes wrong.)

3. No. As above, you can't pick and choose when to use the capital loss. You have to report it and use as much of it as the calculations on the tax form (Schedule D) say each year.

And again, you wouldn't forfeit it, you'd just be filing your taxes wrong and subjecting yourself to IRS letters, fines, penalties, etc. Note that the broker who held your stock for you will probably report this taxable event to you and the IRS with a 1099-B in January 2022. If you don't report it or report it wrong, the IRS computers will be able to automatically see that and I think you'll get a correction letter of some kind.

4. If you're already on the ACA now and worried about your 2021 coverage, you're probably OK for this year. See "Household income below 100% of the federal poverty line." on page 8 of https://www.irs.gov/pub/irs-prior/i8962--2020.pdf. This fall if you're signing up for 2022 coverage, to be completely honest and above board, you should take into account the $3K capital loss carry forward in your income estimate. If possible, you might be able to increase your other income to compensate - do more Roth conversions maybe, or do some more medical studies or whatever. Some people will estimate high just to get coverage, but there is risk associated with this. From the same area in the Form 8962 instructions, it says you can't claim the subsidy if "You, with intentional or reckless disregard for the facts, provided incorrect information to a Marketplace for the year of coverage."

5. Probably not. See the link and description in answer #4 above.

6. If you estimate your income too low this fall, you would be forced off ACA and be offered Medicaid. Technically you could decline Medicaid and just be uninsured.

Thank you for your detailed reponse. You answered/confirmed most of my questions. Just to be sure i'm understanding right, you are saying I can be under the minimum income this year without penalty? I can then say I will make at least the minimum next year which should be around $13K for my state and stay on ACA again with very good subsidies. There is no penalty if I don't actually make that much before or after the capital loss is applied. I do plan to make that much but my income is variable and not very high at all. I could do some Roth conversions if needed or I could take an early withdrawal from IRA to get my income up but it sounds like I don't HAVE TO do that. I do have a decent amount of cash to cover the taxes on a conversion or early withdrawal for several years.

 

[SecondCor521]

Yes, your income can be under the minimum without penalty as long as you meet the criteria outlined at the bottom left column of page 8 on that link (which you probably do).

The general rule is that as long as your state marketplace accepts your estimate and it qualifies you for ACA coverage and the subsidy, then you're generally going to qualify for the subsidy.

I may have been wrong in my answer to #5 above, though. In looking more closely at the instructions for Form 8962, it looks like you might have had to repay $325 of the subsidy (see line 28) *if this same situation had happened last year*. But that would likely only apply if the subsidy you actually got during the year was more than you should have received, which usually only happens if your actual income was higher than your estimated income. In your case it sounds like your actual income will be lower than your estimated income, in which case you wouldn't have to repay anything and might even get some additional credit.

However, the laws around the subsidy were changed earlier this year, so it's hard to say what will happen with the repayment situation this year. If your actual income is lower than your estimated income, though, I would think it very likely that you can both (a) keep your ACA coverage all this year, and (b) not have to repay any subsidy.

 

[jim584672]

Just be aware that the number to avoid Medicaid depends on whether your state expanded Medicaid. If they didn't you need over 100% FPL ($12,760), if they did expand you need over 138% FPL ($17,774). One person house.

 

[aaronc879]

Just be aware that the number to avoid Medicaid depends on whether your state expanded Medicaid. If they didn't you need over 100% FPL ($12,760), if they did expand you need over 138% FPL ($17,774). One person house.

Yes, thank you, I was aware. My state did not expand so I only need to make 100% FPL. If I needed to make 138% then I would be paying the penalty and making early IRA withdrawls to cover the several thousand shortfall. I know it may be hard for many on this forum to imagine but I have a hard time earning $13K/yr in MAGI.

 

[jim584672]

Yes, thank you, I was aware. My state did not expand so I only need to make 100% FPL. If I needed to make 138% then I would be paying the penalty and making early IRA withdrawls to cover the several thousand shortfall. I know it may be hard for many on this forum to imagine but I have a hard time earning $13K/yr in MAGI.

Since you have some before tax money just do a Roth Conversion, not that big of a deal.

 

[aaronc879]

Since you have some before tax money just do a Roth Conversion, not that big of a deal.

Except that cash needs to pay for a new car within the next couple years and cover the shortfall between my income and my expenses. My mortgage PITI and utilities alone is around $13K. I guess ROTH conversions until the cash is low then I either start doing early withdrawals from IRA or sell my home. My income prospects are unlikely to improve.

 

[jim584672]

Except that cash needs to pay for a new car within the next couple years and cover the shortfall between my income and my expenses. My mortgage PITI and utilities alone is around $13K. I guess ROTH conversions until the cash is low then I either start doing early withdrawals from IRA or sell my home. My income prospects are unlikely to improve.

If your income is that low you would owe just minimal taxes at tax time on the conversion. I don't see how this is costing you.

 

[aaronc879]

If your income is that low you would owe just minimal taxes at tax time on the conversion. I don't see how this is costing you.

When you do a conversion do you have to buy a fund that is different than the one you are selling?

 

[SecondCor521]

When you do a conversion do you have to buy a fund that is different than the one you are selling?

No. If the traditional and Roth are in the same place, the shares can just be moved over. You pay taxes on the value of the shares as of the time of the conversion (which the custodian will tell you). (*)

(*) Assuming you don't have basis in your traditional IRA. Most people don't, and if you did you'd probably know it.

 

[Sunset]

When you do a conversion do you have to buy a fund that is different than the one you are selling?

You can actually do an "In KIND" transfer of the fund or shares from the IRA to ROTH.

So you can specify transfer 37 shares of X , rather than sell X in IRA and then buy it in ROTH.

You can buy the same fund/shares without any effect, as selling at a loss in an IRA does not generate a taxable loss under normal circumstances, even if the sale is for less than what you paid for the shares.