Conflicting Advise on Capital Loss Carryover

[thomtax]

Client had Lehman bonds. The brokerage company is showing a loss of $7000 on these bonds as of April, 2012. They have told the clients that as property is sold off, they will be receiving additional amounts in the future.

The client has no taxable income for the yer. The brokerage company was called about this and were told that this was the first time a bankruptcy was handled like this, but that the IRS has told them to handle things this way. Further, and this is the problem, they told the client to show the loss on the return, but not to use any of it this year - carry it over until later years.

TTB, page 6-9, states
If capital losses are more than capital gains, the difference must be deducted even if there is no ordinary income to offset it. The annual limit on the amount of capital loss that can be deducted is $3,000 ($1,500 MFS).

Am I missing something here about not having to use $3,000 of the loss?

Thanks for your advise.
LT

[Golden Rocket]

File the return

The client has no taxable income for the yer. The brokerage company was called about this and were told that this was the first time a bankruptcy was handled like this, but that the IRS has told them to handle things this way. Further, and this is the problem, they told the client to show the loss on the return, but not to use any of it this year - carry it over until later years.

TTB, page 6-9, states
If capital losses are more than capital gains, the difference must be deducted even if there is no ordinary income to offset it. The annual limit on the amount of capital loss that can be deducted is $3,000 ($1,500 MFS).
LT

ThomTax, I believe you should file the return, and use the information statements coming from the brokerage company to define your current year loss and the new mechanics of Sch D/8948. If there is no other SchD activity, this should result in a $3000 reportable loss on the 1040.

Even though there is no current benefit to the loss, if there is no taxable income, the $3000 loss will be carried forward.

We recently had a discussion about carrying forward the loss without filing the return. There are those of us who believe you can get away with it, but you'll never be able to document the carryforward in a manner that all parties will be in synch with it unless you do file the return.

[Bees Knees]

TTB, page 6-9, states
If capital losses are more than capital gains, the difference must be deducted even if there is no ordinary income to offset it. The annual limit on the amount of capital loss that can be deducted is $3,000 ($1,500 MFS).

Am I missing something here about not having to use $3,000 of the loss?

If you continue reading in TTB on page 6-9, it gives you the rules for what happens if not all of the $3,000 loss is needed to reduce taxable income to zero. The example of Gloria at the bottom of the page illustrates that only $150 of the $3,000 loss was needed for Gloria to reduce her taxable income to zero and thus the remaining amount was carried over to the following year.

[thomtax]

If you continue reading in TTB on page 6-9, it gives you the rules for what happens if not all of the $3,000 loss is needed to reduce taxable income to zero. The example of Gloria at the bottom of the page illustrates that only $150 of the $3,000 loss was needed for Gloria to reduce her taxable income to zero and thus the remaining amount was carried over to the following year.

BK - Please forgive the lack of understanding on my part. Following are the actual numbers on my client, without the loss taken into consideration:

Taxable interest 4,635
Pensions (Taxable amount) 11,400
Standard Deduction 13,050
Exemptions 7,600

This leaves an actual taxable income of -4,615 which translates to 0 on line 43.

My software uses these figures and calculates 3,000 to be used on line 13 for capital loss. In the example, are you saying that this should not be used? Although, I stand to be corrected, I was under the understanding that the 3,000 had to be used. If this is not correct, I need to get with the software company to see how to override.

Thanks for your help.

[Bees Knees]

My software uses these figures and calculates 3,000 to be used on line 13 for capital loss.

Well yes, the $3,000 loss will always be reported on line 13, regardless of whether or not taxable income is otherwise zero. Your software is entering the number correctly. But that is not the point. The point is, what does your capital loss carryover worksheet say?

If taxable income is zero without needing any of that $3,000 on line 13, then that $3,000 on line 13 should ALSO be included in the amount that gets carried over to the next year. Look and see what your capital loss carryover from 2012 to 2013 worksheet says.

[Gene V]

according to the worksheet in Pub. 550 ---I show loss carryover of $4015.00
Not sure if that is right or not.

[thomtax]

Well yes, the $3,000 loss will always be reported on line 13, regardless of whether or not taxable income is otherwise zero. Your software is entering the number correctly. But that is not the point. The point is, what does your capital loss carryover worksheet say?

If taxable income is zero without needing any of that $3,000 on line 13, then that $3,000 on line 13 should ALSO be included in the amount that gets carried over to the next year. Look and see what your capital loss carryover from 2012 to 2013 worksheet says.

The capital loss carryover worksheet is showing 4,230 long term carryover. The actual loss is 7,215. Using these figures, it is showing using up 2,985 (?).

[thomtax]

according to the worksheet in Pub. 550 ---I show loss carryover of $4015.00
Not sure if that is right or not.

Thanks Gene. Please see my reply to Bees Knees for the program calculation.

LT

[Bees Knees]

The capital loss carryover worksheet is showing 4,230 long term carryover. The actual loss is 7,215. Using these figures, it is showing using up 2,985 (?).

TTB, page 6-9 under the heading "Below filing requirement" indicates that the deduction for personal exemptions is not allowed for purposes of determining how much of the $3,000 loss is not needed and thus can be carried over to the following year. Thus, if the capital loss is 7,215, taxable interest is 4,635, pension is 11,400, standard deduction is 13,050, and exemptions are 7,600, then the calculation is as follows:

Interest 4,635
Pension 11,400
Capital loss <3,000>
Equals AGI of 13,035
Minus Standard deduction <13,050>
Equals income before exemption deduction <15>

Thus, out of the 3,000 capital loss used to reduce taxable income, not counting the deduction for personal exemptions, 15 of that loss was not needed. In other words, 2,985 (3,000 - 15) of that loss was used, and $4,230 (7,215 – 2,985) is carried over to 2013.

[thomtax]

BK - Thanks for the explanation. I especially need the explanation about not using the personal exemptions. Although I am sure that it is clear to others, for some reason it was not registering with me.

LT