Carryover Loss

[sengsational]

https://books.google.com/books?id=H...l loss carryover but no capital gains&f=false

see the middle column (exceptions 1 & 2)
If you have a capital loss (which includes a capital loss carryover), exception 1 is not met; therefore exception 2
applies.

It's that interpretation of English again... I'd say if you HAVE a capital loss (this year's taxes) that's one thing. If you HAD a capital loss (prior year), that's another. My presumption was that the OP would cease and desist all sales of capital items in the year where the objective was filing a 1040A. If he HAD a capital loss (ie a carry over), then he'd be walking away from that benefit in order for his offspring to get more student loans.

 

[LOL!]

Note that IRS publications are not binding. On something like this, one may wish to consult the actual tax code that the publications try to simplify and present. The tax code itself may address this situation specifically.

 

[Texas Proud]

It's that interpretation of English again... I'd say if you HAVE a capital loss (this year's taxes) that's one thing. If you HAD a capital loss (prior year), that's another. My presumption was that the OP would cease and desist all sales of capital items in the year where the objective was filing a 1040A. If he HAD a capital loss (ie a carry over), then he'd be walking away from that benefit in order for his offspring to get more student loans.

I would argue that if a taxpayer did not want to claim a capital loss then they would not have to file a sch D... the IRS might send a letter to you saying you had a sale, but they also got the loss amount on that 1099... previously they only knew you sold a stock, so assumed that it was all a gain unless you told them otherwise...

BTW, I would respond to the letter if I got one that I did not want to take my loss and was willing to pay higher taxes without doing an amended return...

Your last point is important.... if the taxpayer had a large carryover I would argue that they lost it all since they did not file a sch D and would not have a carryover amount the next year.... my theory would be that the taxpayer made an election to not carry it over to year X so there is no way to carry it to year X+1....

 

[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.

Here's some relevant info from a court case:

Originally Posted by T.C. Memo. 2011-23
Excess net capital losses beyond the $3,000 threshold are treated as either short-term or long-term capital losses in the succeeding taxable year, depending on the character of the capital loss that created the carryover. See sec. 1212(b)(1). To determine the “excess” referred to in section 1212(b)(1), the amount allowed under section 1211(b)(1) or (2) is used in the calculation rather than the amount of the deduction actually claimed in a given tax year. See sec. 1212(b)(2). Therefore, a taxpayer’s capital loss carryover is reduced to the extent a deduction is allowed regardless of whether the taxpayer benefits from the deduction or chooses not to claim the deduction. See sec. 1212(b)(1); Cleveland v. Commissioner, T.C. Memo. 1983-299 (holding that it is not relevant whether the taxpayer claimed any amount of the capital loss carryover in intervening years); see also Rev. Rul. 76-177, 1976-1 C.B. 224 (ruling that a taxpayer must take into account the allowed deduction for purposes of determining the capital loss carryover).

 

[sengsational]

Here's some relevant info from a court case:
Therefore, a taxpayer’s capital loss carryover is reduced to the extent a deduction is allowed regardless of whether the taxpayer benefits from the deduction or chooses not to claim the deduction.

I'll say one thing for you NS, you have awesome powers of finding-out stuff! Going to the case law seems like an undue burden, at least to me, who gets lost very easily in that kind of thing. My approach, poor as it is, would be to try hard in just the instructions to find a way to interpret that the way I wanted to proceed was not prohibited, and if not, let the chips fall where they may. But that approach would have cost me money in this case, because I would have thought that all of the capital loss carryover would be lost if you skipped one year. But it's only reduced by $3,000!

 

[RunningBum]

I would think it would be reduced by $3000 + whatever capital gains distribution you have since you would offset that as well.

 

[Gatordoc50]

I think the carryover is reduced by the amount that would have been used if it was claimed. That could be anywhere from zero to the entire carryover amount.

 

[NanoSour]

I think the carryover is reduced by the amount that would have been used if it was claimed. That could be anywhere from zero to the entire carryover amount.

I'm not sure about this one as you would have paid taxes on the gain. This would end up in double taxation on gains. Once when you filed without taking the carryover loss into account, and a second time when you could have taken the loss had you not used it without actually using it.

 

[kaneohe]

I'm not sure about this one as you would have paid taxes on the gain. This would end up in double taxation on gains. Once when you filed without taking the carryover loss into account, and a second time when you could have taken the loss had you not used it without actually using it.

or you could say it was taxed 1 more time than it should have been......
2x instead of 1. You could say a similar thing about the 3K of income that was taxed instead of sheltered when you gave up the yrs carryover although in that case that thing was taxed 1x instead of 0x so not quite the same thing....
but similar.

I have complete faith in your research abilities tho to find something related to this.......for now, I vote w/ RunningBum &Gatordoc.....

 

[Jimbo125]

OK, I am a tax expert (i.e. CPA) and I usually go to the IRS website for authoritative answers. However, they don't give a lot of advice regarding how to intentionally file your tax return incorrectly. (LOL)

I probably wouldn't have a problem leaving off a CL carryforward of my personal return, because there would be no penalty for overstating your income. However, I would have a problem filing a FAFSA (which is a Federal Form) with knowingly circumventing the rules in order to get financial aid.

The FAFSA does retrieve your tax data directly from the IRS. Whether you report it or not on your tax return, the IRS knows you have a carryforward and will know that you should have reported it. The IRS says that you have a deduction that is "allowed or allowable". This basically means "Use it or Lose it" They will keep track of how much of the carryforward you should have used each year. It is entirely possible that they will send you a CP2000 that advises you that they have made changes to your return.

It is the corrected information that gets reported to FAFSA. I don't know what the penalty for filing a false FAFSA is, but I know at a minimum, it will delay any financial aid that you were planning on getting.

 

[kaneohe]

It seems crazy to me that FAFSA would depend on which form you file..... 1040A
or 1040. I would think they would be interested in income and /or assets with perhaps some smooth transition w/o step-function cliffs which lead folks to do avoidance things.

 

[sengsational]

I was surprised by that rule too. My guess is that it's a rough-cut at keeping those that would otherwise have to get a consultant to fill-in the fafsa out of the details. I'm talking about a whole lot of people that don't have investments, are not familiar with terms we all on this site take as obvious. They are every bit as smart, I'm sure, but since they haven't been exposed to tax and investing, giving them an easy-out might be easier for the financial aid folks than dealing with nonsense data in the application, or they might see the complexity and give up.

 

[NanoSour]

OK, I am a tax expert (i.e. CPA) and I usually go to the IRS website for authoritative answers. However, they don't give a lot of advice regarding how to intentionally file your tax return incorrectly. (LOL)

I probably wouldn't have a problem leaving off a CL carryforward of my personal return, because there would be no penalty for overstating your income. However, I would have a problem filing a FAFSA (which is a Federal Form) with knowingly circumventing the rules in order to get financial aid.

The FAFSA does retrieve your tax data directly from the IRS. Whether you report it or not on your tax return, the IRS knows you have a carryforward and will know that you should have reported it. The IRS says that you have a deduction that is "allowed or allowable". This basically means "Use it or Lose it" They will keep track of how much of the carryforward you should have used each year. It is entirely possible that they will send you a CP2000 that advises you that they have made changes to your return.

It is the corrected information that gets reported to FAFSA. I don't know what the penalty for filing a false FAFSA is, but I know at a minimum, it will delay any financial aid that you were planning on getting.

Thanks for your input Jimbo. In response, I'll say that I'm certainly not trying to circumvent any law in DDs filing of the FAFSA. I'm simply trying to take advantage of the laws as they are written. Please note, I didn't write any of these law regarding taxes or the FAFSA.

For whatever reason, there is such a thing as the Simplified Means Test. I do find it strange that one without any carryover loss can qualify for this test, and its resultant lowered EFC, regardless of total amount of assets. One could have $1M in cash assets and by virtue of no capital gains transactions in a given year can legally file the 1040A thereby eliminating the assets from the EFC calculation.

Another family with a $100 loss carryover and only $500K in assets would get slammed on the FAFSA if legally required to file the 1040 in lieu of the 1040A.

My case is fairly straight forward. I meet the simplified means test requirement of under $50K AGI and without having to file the Schedule D, I can file the 1040A. It seems to me that with only a carryover loss to report and no 1099Bs, you are not required to file the Schedule D. I don't believe any law will be broken if I don't file the Schedule D and file a 1040A. Nor do I believe I'll be circumventing any FAFSA rules by stating I was eligible, and in fact did file a 1040A.

Nano

 

[sengsational]

Well said, NanoSour, I'm in agreement with all of that; it doesn't look like any laws are broken to me (admittedly only another parent of a college kid trying to wade through the morass).

No matter how much they try, it's impossible to build a set of rules that is even close to 100% fair, and is simple enough for mere mortals to wade through.

Another bit of the FAFSA rules that is unfair is the "tax on savings". For example, say you have two families, each with your proverbial $100 loss. Both families have the same total lifetime earnings record on their social security statement. Family "A" has $500K in the bank and Family "B", spent their savings on new cars every two years, a $250/month cell phone bill, etc, so they have $1K in the bank. The EFC for family "B" will be $28K lower than family "A". So the formula gives an incentive to blow your money rather than save it. That's especially true for kids' assets. If a kid had the $500K, the EFC for one year would be $125K!

 

[pb4uski]

Yes, that is true of college aid generally... all else being equal it rewards spenders and penalizes savers.

Like you sengsational, I don't think there is much risk with what NanoSour is thinking of doing. It is unlikely that the IRS will get upset that he is paying more taxes than he is legally required to and filing the "wrong" form in the process.

As long as NS is truthful in his FASFA filing I don't see a lot of risk there and I doubt that they will ask if he should have filed a 1040 rather than a 1040A.

I guess the remaining question is more of an ethical question. As we sometimes said at Mega when we had thorny decisions, could we live with everything that we knew being on the front page of the local paper the next day and still hold our heads high that we had done the right thing in a difficult situation. NS will have to wrestle with that one.

 

[NanoSour]

I guess the remaining question is more of an ethical question. As we sometimes said at Mega when we had thorny decisions, could we live with everything that we knew being on the front page of the local paper the next day and still hold our heads high that we had done the right thing in a difficult situation. NS will have to wrestle with that one.

Trust me, I'll have no problem sleeping well at night with this on my conscience. If the government can afford to shell out billions of dollars for "under-privileged" children in the form of grants/scholarships/loans regardless of academic achievement and ability to repay loans, then it can afford to supplement my DDs higher education given that she is an A student who dedicates herself to achieving academic excellence. I don't believe my 30 years of sacrifice so that I could ER should be free pickens for the education industrial complex. If we go back to 1970s college costs, I'll be glad to pay the full boat for my children's college education. Till then, I have no problem with society funding her inflated higher education costs. I apologize for the slight rant.

Nano

 

[RunningBum]

I never thought there was anything ethically wrong with what Nano wants to do. I just think he is potentially caught up in a technicality, one that doesn't really make sense. I don't think it's all that straightforward, and I think there is a potential for an issue down the line, whether it be with the IRS when the carryover loss is resumed or for FAFSA falsification on a technicality.

I am virtually certain you have to reduce the carry over by the amount you would have if you claimed it (3000 + gains). Maybe the IRS is cool with you resuming it, or maybe they will be sending one of their letters when they see you claim a carryover in the future when you had none the year before, but hopefully they'll accept your explanation for the gap.

And as far as the claim that this is double taxation, that's off base. It's like having someone offer you $1 today and you turn it down, and then tomorrow asking for that $1 and them telling you the deal was only good yesterday. You didn't lose $2, you only lost $1, and that was of your own doing.

As I said, ethically, I don't think anything bad of Nano for doing this. But if it bites him later, I have no sympathy since a few of us, including a tax CPA, warned him it might be a problem. I definitely get the feeling he is taking the answers he wanted to hear out of this and ignoring the ones he doesn't. Not my business though. I'm very uncertain either way now that I understand that the capital gains are only distributions, not for 1099 reported sales.

 

[MooreBonds]

Thank you for all the replies. I feel pretty comfortable with the fact that if I have no capital gains transactions (sale of stock/funds) in the year preceding the FAFSA, then I can file the 1040A and take advantage of the Simplified Means Test. This was a planning exercise in that I will not be filing the FAFSA till Jan 2017. This means I have to plan on no fund sales for the entire year of 2016.

Don't forget that listed stocks that pay distributions with PIK (payment in kind) shares in lieu of cash dividends do provide a way to realize "capital gains" on your holdings that could use up those accumulated carryover losses.

As an example, EEQ is a subsidiary of Enbridge Energy. EEQ distributes shares in lieu of dividends. Your cost basis on the distributed shares is $0. When you sell those shares, you pay capital gains based on the difference between your cost ($0) and the price you get for them. If you are trying to avoid any transactions in 2016, you can still buy some in 2015, sell the distributed shares in December 2015 for 100% short-term gain, and use up some of those carryover losses.

The list isn't huge of companies that issue PIK dividends....but there are some out there.

Also, another thought: look for mutual funds with large undistributed long-term capital gains. Could be worth it to buy some of those - if they distribute those long-term gains (must be long-term, as short-term gains distributions are taxed as dividends) in either 2015/2016, then you can use that to offset against your losses without having to show any sales transactions.

 

[NanoSour]

In an effort to ensure I remained within the boundaries of the law, I visited my local IRS Office today to get the definitive answer to the question of whether you are required to file a Schedule D and henceforth the 1040 if you only have a Capital Loss Carryover.

And the final answer was, "you do not have to file the Schedule D and 1040 if only reporting a Capital Loss Carryover". This is good news to me and finally puts this question to bed.

 

[Jimbo125]

You trust the IRS to give you the right answer? I have a bridge for sale...

Seriously, you took the extra step and have satisfied the ethics of all this. I give you credit for that. I hope that everything works out, and that the IRS doesn't screw you up by reporting something different to the FAFSA. After 38 years of dealing with the IRS, the lack of communications between departments and the poor quality of service we get from them is appalling.

In an effort to ensure I remained within the boundaries of the law, I visited my local IRS Office today to get the definitive answer to the question of whether you are required to file a Schedule D and henceforth the 1040 if you only have a Capital Loss Carryover.

And the final answer was, "you do not have to file the Schedule D and 1040 if only reporting a Capital Loss Carryover". This is good news to me and finally puts this question to bed.