Carryover Loss

[NanoSour]

Need a tax "expert" to chime in here. I have a carryover loss that I'd like to surrender so that I can file a 1040A instead of a 1040. Is this allowed?

I really don't need the carryover loss since I'm in the 15% bracket and capital gains are taxed at 0%. The $3000 annual income deduction is insignificant compared to how much my Expected Family Contribution (EFC) for college aid will be lowered if I can file the 1040A.

Thoughts?

[GrayHare]

Awhile ago I wondered if carryover losses could be carried over to a future year of the taxpayer's choice. That's not exactly the same as your question, but the conclusion here was IRS regs now say a carryover loss must be taken the next tax year.

[kaneohe]

How does filing a 1040A help? Is it just that it doesn't allow the loss carryover and so your income is higher? If that is the key, then don't you have anything you can sell for a gain to "neutralize" the loss? You'd basically be wasting the loss but if the higher income is important.........

[Gatordoc50]

It doesn't appear that having a capital loss carryover requires a schedule D or 1040. My guess is that you could file 1040A but might lose the carryover. It might be better if you filed 1040 and report to the fin aid folks that you were eligible to file 1040A but chose not to.

[LOL!]

Special rules for FAFSA allow no income folks with tons of assets to not have to declare those assets if they file a 1040A instead of a 1040.

Maybe not for this year, but for the future 1040A, just use up all your carryover losses by selling some assets with capital gains, so that they net out to zero cap gains.

[Texas Proud]

Quote:

Originally Posted by GrayHare Awhile ago I wondered if carryover losses could be carried over to a future year of the taxpayer's choice. That's not exactly the same as your question, but the conclusion here was IRS regs now say a carryover loss must be taken the next tax year.

Actually slightly wrong... IF you want to take the carryover you must take it the next year.... there is nothing that requires you to take it.... you can just not put in down and you lose it....

[Jimbo125]

The law says that you have to reduce your income by a capital loss before you reduce it by a personal exemption. Therefore, your would have to report it to prepare an accurate return.

[NanoSour]

Quote:

Originally Posted by Jimbo125 The law says that you have to reduce your income by a capital loss before you reduce it by a personal exemption. Therefore, your would have to report it to prepare an accurate return.

If this is true, and I'm not saying it's not, it does not seem to prohibit the personal exemption if you don't take the loss. Using the tax forms, your personal income is reduce before you take the exemption on page 2 of the 1040.

Also, I believe I once heard that if you don't file a tax return, you still have to reduce the capital loss as if you took it for each year you don't file. For example, if one did not work for 6 years and had a $20K loss carryover from their last year of employment, one could not file tax returns for the years of not working; however, when they did finally file in the 7th year, the loss carryover would be reduced by $18K (6*3K/year) and would now be $2K. I'm not sure this is correct.

[Texas Proud]

Quote:

Originally Posted by Jimbo125 The law says that you have to reduce your income by a capital loss before you reduce it by a personal exemption. Therefore, your would have to report it to prepare an accurate return.

Can you give some backup to this

Here is from the IRS site:

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim on line 13 of Form 1040 to lower your income is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss shown on line 16 of the Form 1040, Schedule D (PDF), Capital Gains and Losses. If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in either Publication 550, Investment Income and Expenses, or the Form 1040, Schedule D Instructions (PDF), to figure the amount you can carry forward.

Notice it says you can carry the loss forward... it does not say you must.

On another page it says "You must report all capital gains."

Ten Important Facts About Capital Gains and Losses

[kaneohe]

Quote:

Originally Posted by NanoSour ........................ Also, I believe I once heard that if you don't file a tax return, you still have to reduce the capital loss as if you took it for each year you don't file. For example, if one did not work for 6 years and had a $20K loss carryover from their last year of employment, one could not file tax returns for the years of not working; however, when they did finally file in the 7th year, the loss carryover would be reduced by $18K (6*3K/year) and would now be $2K. I'm not sure this is correct.

Not exactly true......you must use the loss carryover each yr regardless of whether you file. Under "normal" circumstances with "normal" income, what you say would be true. The amount of the carryover is determined by the loss carryover worksheet and it "normally" results in that 3K loss being used up each year.

However when income in very low, although you must use that 3K loss each yr,
the loss carryover worksheet may result in little or none of that being used up so it is possible that some of the loss may last longer than you think. There is a difference between being used and being used up.

[RunningBum]

Quote:

Originally Posted by Texas Proud Can you give some backup to this On another page it says "You must report all capital gains." Ten Important Facts About Capital Gains and Losses

This would seem to be the sticking point to make you file 1040, because I don't think you can file schedule D with 1040A, right? The IRS will get a report of the stock sales and want them accounted for. If you don't, they will assume the basis is 0, and send you a bill for the tax on the entire amount. I guess if it's still under the 15% limit it would be ok, but I think you're going to need to do a 1040. Why is that an issue?

[sengsational]

If your question is "can I get away with filing a 1040A", then forget everything in this thread and look only at the rules for filing a 1040A! If those rules don't say you must not file a 1040A if you have a earlier year loss, then go for it. That is, given the loss of the benefit of the CFL is smaller that the benefit from the FAFSA. Note that if the FAO has an earlier tax return of yours, and they see your EFC drop like a stone, then there is no "law" that says the must award you what the rules say. In other words, EFC is just a suggestion that is most often, but not always followed.

That 1040A rule lookes so juicy to me, but my situation didn't allow it. You might check on collegeconfidential, but beware that there are some folks over there that think that legally maximizing your benefit is "cheating".

[RunningBum]

Sorry, I missed the reason for wanting to file a 1040A in the OP. However, to address seng's point:

Quote:

If you cannot use Form 1040EZ, you may be able to use Form 1040A if: Your income is only from wages, salaries, tips, taxable scholarships and fellowship grants, interest, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, taxable Social Security or railroad retirement benefits, and Alaska Permanent Fund dividend

You have capital gains income from a stock sale. This is not one of the things listed as "income is only from". It doesn't say anything about whether you have tax due on that income, but rather whether you have such income. Seems pretty clear to me, but you could call or email the IRS to ask.

[Texas Proud]

Quote:

Originally Posted by sengsational If your question is "can I get away with filing a 1040A", then forget everything in this thread and look only at the rules for filing a 1040A! If those rules don't say you must not file a 1040A if you have a earlier year loss, then go for it. That is, given the loss of the benefit of the CFL is smaller that the benefit from the FAFSA. Note that if the FAO has an earlier tax return of yours, and they see your EFC drop like a stone, then there is no "law" that says the must award you what the rules say. In other words, EFC is just a suggestion that is most often, but not always followed. That 1040A rule lookes so juicy to me, but my situation didn't allow it. You might check on collegeconfidential, but beware that there are some folks over there that think that legally maximizing your benefit is "cheating".

That is not clear in the OPs post... is his gain a distribution where he could file a 1040A or a sale of stock...

I have never filled out a 1040A, so I really do not know the form at all and what can and cannot be put on it... but I do not think you can have a Sch D with it...

[NanoSour]

The specific reason I'm researching this is that I will forgo making any stock sales in the year prior to filing the FAFSA. This way I'll only have Capital Gains Distributions (which should be limited since most distributions are dividends) and appear to be eligible to file 1040A. The ability to file 1040A and disregard assets under the Simplified Means Test decreases my EFC by ~$26K. No small amount. At least not in my world.

From my research, if you are "eligible" to file 1040EZ or 1040A, and have less than $50K in adjusted gross income, your assets will not be used in the formula to calculate EFC. At least not on the FAFSA. The CSS is a different animal.

Unfortunately, I have significant carryover losses that could take years to unwind at $3K/year.

[pb4uski]

But do you have unrealized gains that you could sell and utilize the carryover losses?

While I think Jimbo is right and technically you shoudl file a 1040, on the other hand I don't sense a lot of tax risk with filing a 1040A and effectively forfeiting your capital loss carryover since you will be voluntarily paying more taxes by filing a 1040A vs a 1040.

The only concern I have is that filing a 1040A and then using it in your FASFA might be considered to be fradulent, but that would be a remote possibility I think.

I depends on how much risk you care to take.

[sengsational]

Quote:

Originally Posted by RunningBum Sorry, I missed the reason for wanting to file a 1040A in the OP. However, to address seng's point: Quote: If you cannot use Form 1040EZ, you may be able to use Form 1040A if: Your income is only from wages, salaries, tips, taxable scholarships and fellowship grants, interest, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, taxable Social Security or railroad retirement benefits, and Alaska Permanent Fund dividend You have capital gains income from a stock sale. This is not one of the things listed as "income is only from". It doesn't say anything about whether you have tax due on that income, but rather whether you have such income. Seems pretty clear to me, but you could call or email the IRS to ask.

I seriously doubt that "forgetting" a carry forward loss is any kind of fraud or punishable offense! Back in the old days (before computerized taxes), or even recent days (if you switched from TT to TaxCut), I'm sure TONS of people lost the benefit of the carry-forward amount.

Here's what is says about an exception to having to file a schedule D (which would obligate you away from the 1040A):

Quote:

You do not have to file Form 8949 or Schedule D (Form 1040) if you have no capital losses and your only capital gains are capital gain distributions from Form(s) 1099-DIV, box 2a. If any Form(s) 1099-DIV you receive have an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain), or box 2d (collectibles (28%) gain), you do not qualify for this exception.

Nothing there about carry forward losses. I'd say if you keep your CG nose clean, then the 1040A is your ticket to more grants and loans.

[kaneohe]

Quote:

Originally Posted by sengsational .............................Nothing there about carry forward losses. .

English is a funny language that you can bend to support what you want.....

Here is a sentence from IRS:
"The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years." Tax Topics - Topic 409 Capital Gains and Losses
They tried to make it clear that LTCL here meant carryovers too. They used the word "including" and not the word "and" to suggest that one was inclusive of the other and that they were not non-intersecting entities.

[sengsational]

Net long-term capital gain is one thing. But the "You do not have to file..." language just talks about 1) not having capital losses and 2) you have no "capital gains" or if you do they are only distros. If they meant net capital gains, well, they should have said that! And if I don't have any capital gains, and I run my taxes with a carry forward loss, I STILL don't have any capital gains, net or otherwise, do I? I have a carry forward loss. Maybe there's a more finely pointed definition for when a Schedule D is required, but with this definition, I'm not seeing a problem.

[LOL!]

I really want NanoSour to go for it and let us know how it all works out. Doesn't everybody else feel the same way? Let's be encouraging.

I will say that the financial aid offices do not have to give out grants, but can give out loans instead. That's a pretty safe way of making sure they get the parents and student to pay for college anyways.