Planning with Capital Loss Carryovers
By Laura Johnson, EA
Capital loss carryovers are valuable. They help investors limit the tax on gains and can also offset ordinary income, such as salary or interest income. Here are some planning opportunities with capital loss carryovers.
What is a capital loss carryover?
In a year when your realized capital losses exceed capital gains, you have an overall capital loss. The loss can be used as a deduction against other ordinary income, for example against salary income. This deduction is limited to $3,000 per year. The $3,000 limit applies whether you are a single or married taxpayer filing a joint return. The limit is $1,500 for a married taxpayer filing separately from his spouse.
Let’s look at an example: You have a current year overall capital loss of $30,000. Of that amount, $3,000 can be used to reduce your current year ordinary income. The remaining $27,000 of loss becomes a capital loss carryover and can be applied against future capital gain, or to extent it exceeds capital gain, to offset ordinary income in a future year, subject to the $3,000 limitation in that later year.
Do capital loss carryovers expire?
Capital loss carryovers of an individual taxpayer last as long as the taxpayer does. They only expire after the year of a taxpayer’s death. For married taxpayers, the losses can be used on the decedent’s final income tax to offset capital gain of the surviving spouse, if the return is filed jointly. In the year after death, any remaining capital loss carryover attributable to the decedent is lost.
How are capital loss carryovers allocated between spouses?
Capital loss carryovers are deductible by the taxpayer who sustained the loss. If the property is held jointly, then the loss is allocated between taxpayer and spouse proportionally to their interest in the underlying property.
It is not always evident to which taxpayer a loss carryover is attributable to. It is important to consider the owner of the property whose sale or disposal generated the loss to make that determination.
This issue should also be considered in context of spouses who are divorcing or who file separate returns.
Married taxpayers – planning in the year of death
If the decedent has a capital loss carryover, the surviving spouse would be well advised to plan accordingly. For example, she could sell appreciated positions in her portfolio in order to benefit from the decedent’s losses. As previously mentioned, the capital loss carryover is available on the decedent’s final tax return, but will be lost thereafter.
Are you and your financial advisors aware?
Loss carryovers are calculated when your tax returns are prepared. That information may or may not be shared with your financial advisors. It is valuable for financial advisors to be aware of such losses when making future investment decisions. Perhaps an advisor would be more willing to sell an appreciated position when she knows there is a loss available to soften the tax hit for the client. You would be well advised to keep your investment advisor in the loop if you have capital loss carryovers.
At John Schachter + Associates, we help our clients make the most of their capital loss carryovers. Talk to us. Let us know how we can help you.
