Capital Loss Carryover

[origun]

Taxpayer had a large capital loss in the past which hasn't been used up. In 2006 our software calculated a -3000 even though he had no tax liability and received no benefit. Now in 2007, he has a large capital gain and would like to use up his capital loss, including the $3000 in 2006. So...my question: can I amend 2006 return and remove the $3000 capital loss so it can be used beneficially in 2007?

[David1980]

No need to amend 2006. Use the worksheet in Schedule D instructions on page D-7.

http://www.irs.gov/pub/irs-pdf/i1040sd.pdf

[Chief]

Capital Loss Carryover

I agree. I had several clients that same way. I simply removed the loss before e filling. The loss remains for when the client has a large capital gain in the future.

[Koss]

Agree and Disagree

No need to amend 2006. Use the worksheet in Schedule D instructions on page D-7.

http://www.irs.gov/pub/irs-pdf/i1040sd.pdf

I agree with David. The worksheet that appears in the instructions for Schedule D is designed to calculate the capital loss carryover by looking at the previous year's return, and determining whether there was any tax benefit from the $3000 loss. If there was none, then the entire loss will carry forward.

The worksheet should be built into your software. But it will only work properly if all of the following are true:

(i) you did the 2006 return,
(ii) the carryover within the 2006 return was accurately calculated from the 2005 return, or manually entered correctly, and
(iii) your program is properly importing data from the 2006 return.

I simply removed the loss before e filling. The loss remains for when the client has a large capital gain in the future.

Where I disagree is with Chief's comment that last year he removed the loss before filing the return. Doing that causes two problems:

(i) data won't import accurately from the 2006 return to the 2007 return, and
(ii) the fact that no loss was reported on the 2006 return may cause the IRS database to lose track of the capital loss carryover.

I know it's counterintuitive, but the act of including the loss even though it does not reduce tax liability is exactly what preserves the data for the following year's return--both in your professional software, and in the program used by the IRS.

Even if the taxpayer had no Schedule D transactions at all during one particular year, if you follow the instructions, or let the software do its job, Schedule D will still be completed to enter the entire amount of the capital loss carryover from the previous year. These amounts appear on lines 6 and 14 of Schedule D. This is what generates the negative $3000 on the front of Form 1040.

Whether the return is filed electronically or by mail, Schedule D should be part of the return, even if the loss offers no tax benefit. Schedule D records the carryover from one year to the next.

The worksheet is what determines whether any of the loss was actually used. In this regard, our software is different from the program used by the IRS. Our software will import data from the previous year's worksheet, and recognize that none of the loss was used. But the worksheet isn't filed with the return, whether on paper or electronically. The only way the IRS can track the loss from year to year is from the data on Schedule D. The IRS program is probably transferring data from Schedule D to its own worksheet. If you don't file the Schedule D, that worksheet will not populate in the IRS system.

And the client may get a letter from the IRS which basically asks: Where did this capital loss carryover come from? You didn't file a Schedule D last year.

If you're not following all this, you'll just need to go to the 2006 return, and do the worksheet on page D-7 of the Schedule D instructions by hand. Then, do the 2007 Schedule D by hand, and you'll see how the entire loss is still carrying over, even though there was a $3000 loss on Form 1040 of the 2006 return.

When it's not used, it's not getting lost. It's getting retained.

Removing an unused capital loss carryover actually destroys the process that is used to carry it forward.

[Koss]

Carryover Rules

My post above is not entirely accurate. I've started looking at this, and the worksheet appears to require that you use up a certain amount of the loss each year even if there is no income to offset it.

I stand by my original claim that Schedule D should be filed every year to properly document the loss and carry it forward. But it is not correct to say that if there is no tax benefit that the entire amount of the loss carries forward to the following year.

The worksheet does not automatically burn up $3000 of the loss each year. There is a complicated formula that involves taxable income before the personal exemptions.

I did not fully understand this until I got involved in this thread, and the formula is not easily recognized or stated in the worksheet. The IRS worksheet is accurate, but I gave up trying to extrapolate the formula from it, and went directly to the Internal Revenue Code.

What I found kind of blew me away. As I noted above, a certain portion of the loss erodes away each year if there is little or no income to absorb it. But if the worksheet is used accurately, then the correct figures will transfer over to the following year's return, whether you do it by hand or with software.

I'll post again on this when I've had a chance to fully digest this.

It's IRC 1212(b).

You can't just skip a year and preserve the entire loss. You have to use the worksheet or you won't get an accurate carryforward value.

[Gene V]

My post above is not entirely accurate. I've started looking at this, and the worksheet appears to require that you use up a certain amount of the loss each year even if there is no income to offset it.

I stand by my original claim that Schedule D should be filed every year to properly document the loss and carry it forward. But it is not correct to say that if there is no tax benefit that the entire amount of the loss carries forward to the following year.

The worksheet does not automatically burn up $3000 of the loss each year. There is a complicated formula that involves taxable income before the personal exemptions.

I did not fully understand this until I got involved in this thread, and the formula is not easily recognized or stated in the worksheet. The IRS worksheet is accurate, but I gave up trying to extrapolate the formula from it, and went directly to the Internal Revenue Code.

What I found kind of blew me away. As I noted above, a certain portion of the loss erodes away each year if there is little or no income to absorb it. But if the worksheet is used accurately, then the correct figures will transfer over to the following year's return, whether you do it by hand or with software.

I'll post again on this when I've had a chance to fully digest this.

It's IRC 1212(b).

You can't just skip a year and preserve the entire loss. You have to use the worksheet or you won't get an accurate carryforward value.

I'll have to disagree, when I do the worksheet and have negative number of more than
$3000 from line 41 Form 1040, then all of the capital loss is carrying forward.

[Koss]

I'll have to agree

When I do the worksheet and have a negative number of more than $3000 from line 41 Form 1040, then all of the capital loss is carrying forward.

Yes, that is my conclusion also.

But if line 41 has a positive number, or a negative value of less than $3000, then some of the loss does not carry forward.

[Jesse]

My post above is not entirely accurate. I've started looking at this, and the worksheet appears to require that you use up a certain amount of the loss each year even if there is no income to offset it.

I stand by my original claim that Schedule D should be filed every year to properly document the loss and carry it forward. But it is not correct to say that if there is no tax benefit that the entire amount of the loss carries forward to the following year.

The worksheet does not automatically burn up $3000 of the loss each year. There is a complicated formula that involves taxable income before the personal exemptions.................

...................I'll post again on this when I've had a chance to fully digest this.

It's IRC 1212(b).

You can't just skip a year and preserve the entire loss. You have to use the worksheet or you won't get an accurate carryforward value.

This is what I thought but don't have time to research at this time. A couple years ago I had to dig into this issue but can't remember the details and don't have enough info to argue the issue. So Koss keep diggin'.

[S T]

Me too

I have had a couple of returns, where I had capital loss carryover, and I don't have time to research either, but we filed returns.

It seems the $3,000 was posted and used in the years that we had no offsets and decreased the carryover to the next year, but I am not for sure.

Would be an interesting subject after 4/15

Sandy

[origun]

Thanks for all your thoughts. Tomorrow at the office, I will go to the 2006 return and input info in the worksheet from Sch D Instructions. (I wasn't aware of the worksheet before I heard from you--thanks.) We didn't do the 2006 return at our office so will have to input all prior carryover into our software anew rather than relying on software carrying it over. I have sent question to Delphis Tax Solutions so if I receive any new insights, will share.

[origun]

Delphis Tax Solutions gave a similar response and referred me to the same worksheet that some of you did. Thanks!