Okay, I'm starting a new thread on this...
Taxpayer is single with no dependents, and has only $8000 of wage income. He also has a capital loss carryover of $4000. He doesn't itemize, and is not claimed as a dependent. If there was no capital loss carryover, this guy could file Form 1040EZ. His standard deduction of 5350 and his exemption of 3400 will reduce his taxable income to zero.
The question that arose in an earlier thread is:
Can we just ignore the capital loss carryover and pick it up again in a later year, since it obviously is of no benefit to the taxpayer in the current year?
The answer is NO.
The formula established by IRC 1212(b) uses up a certain portion of the capital loss carryover each year. In some cases, the portion that must be used up works out to be zero, and the entire loss carries forward. But in other cases, some of the loss is used up, even though it does not actually reduce tax liability.
The amount that must be used up each year is the lesser of the following two amounts:
(i) $3000
(ii) line 41 + $3000
The amount that must be used up can be zero, but it can never be less than zero. If line 41 has a negative value, and that value is negative or zero after adding 3000, then the amount used up that year will be zero.
So what Gene said in the previous thread is exactly right. If line 41 has a value of -3000 or lower, none of the carryover is used up, and the entire loss carries forward.
But if you leave out the capital loss carryover, and pretend it doesn’t exist, a taxpayer can easily have a positive number on line 41 and still have zero taxable income and zero tax liability. Line 41 doesn’t have a official name or label, but it’s taxable income before exemptions. (Actually, the Code refers to it as adjusted taxable income.)
In other words, some taxpayers have zero taxable income on line 43, even if they don’t use any of their capital loss carryover. But if they have a positive number on line 41, they will be forced to use up some of the loss carryover, even though it doesn’t really benefit them. Their taxable income is zero, and their tax liability is zero, with or without the capital loss carryover, because their exemptions reduce their taxable income to zero. But IRC 1212(b) will require some of the loss to be used when the value on line 41 is greater than -3000.
The rules for the application of the loss appear to be very similar to the rules that are used to calculate a Net Operating Loss.
Line 41 may not be labelled, but it is one of the most important lines on the return. Taxable income on line 43 can never be less than zero. But line 41 accepts negative values. And that’s what drives the entire carryover worksheet.
IRC 1211 and 1212 are among the most recursive texts I have ever seen. This is what makes reading the code so difficult: numerous self-referential functions where the rules seem to fold back on themselves. Here they are, for those that are interested:
1211. Limitation on capital losses
(a) Corporations
In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.
(b) Other taxpayers
In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of—
(1) $3,000 ($1,500 in the case of a married individual filing a separate return), or
(2) the excess of such losses over such gains.
1212. Capital loss carrybacks and carryovers
(a) Corporations
(1) In general
If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the “loss year”), the amount thereof shall be—
<SNIP>
(b) Other taxpayers
(1) In general
If a taxpayer other than a corporation has a net capital loss for any taxable year—
(A) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and
(B) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year.
(2) Treatment of amounts allowed under section 1211 (b)(1) or (2)
(A) In general
For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of—
(i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211 (b), or
(ii) the adjusted taxable income for such taxable year.
(B) Adjusted taxable income
For purposes of subparagraph (A), the term “adjusted taxable income” means taxable income increased by the sum of—
(i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211 (b), and
(ii) the deduction allowed for such year under section 151 or any deduction in lieu thereof.
For purposes of the preceding sentence, any excess of the deductions allowed for the taxable year over the gross income for such year shall be taken into account as negative taxable income.
Section 151 is the section of the IRC that authorizes exemptions for the taxpayer, spouse and dependents.
The basic concept seems to be this: Each year you have to use your capital loss carryover to get the value of line 41 down to negative 3000. If line 41 is already at negative 3000 or lower, without using any of your carryover, then you don't need to use any of it up. But if line 41 has a value of -2999 or higher, you will be required to use any available portion of your loss to reduce line 41 to minus 3000.
If you are unlucky enough to have a zero or a small positive number on line 41, you will have to use up $3000 of your carryover (if you have that much available), even though you probably have a $3400 exemption that is ready and waiting on line 43.
That's about as close to plain English as I think I can get at this hour. LOL
Taxpayer is single with no dependents, and has only $8000 of wage income. He also has a capital loss carryover of $4000. He doesn't itemize, and is not claimed as a dependent. If there was no capital loss carryover, this guy could file Form 1040EZ. His standard deduction of 5350 and his exemption of 3400 will reduce his taxable income to zero.
The question that arose in an earlier thread is:
Can we just ignore the capital loss carryover and pick it up again in a later year, since it obviously is of no benefit to the taxpayer in the current year?
The answer is NO.
The formula established by IRC 1212(b) uses up a certain portion of the capital loss carryover each year. In some cases, the portion that must be used up works out to be zero, and the entire loss carries forward. But in other cases, some of the loss is used up, even though it does not actually reduce tax liability.
The amount that must be used up each year is the lesser of the following two amounts:
(i) $3000
(ii) line 41 + $3000
The amount that must be used up can be zero, but it can never be less than zero. If line 41 has a negative value, and that value is negative or zero after adding 3000, then the amount used up that year will be zero.
So what Gene said in the previous thread is exactly right. If line 41 has a value of -3000 or lower, none of the carryover is used up, and the entire loss carries forward.
But if you leave out the capital loss carryover, and pretend it doesn’t exist, a taxpayer can easily have a positive number on line 41 and still have zero taxable income and zero tax liability. Line 41 doesn’t have a official name or label, but it’s taxable income before exemptions. (Actually, the Code refers to it as adjusted taxable income.)
In other words, some taxpayers have zero taxable income on line 43, even if they don’t use any of their capital loss carryover. But if they have a positive number on line 41, they will be forced to use up some of the loss carryover, even though it doesn’t really benefit them. Their taxable income is zero, and their tax liability is zero, with or without the capital loss carryover, because their exemptions reduce their taxable income to zero. But IRC 1212(b) will require some of the loss to be used when the value on line 41 is greater than -3000.
The rules for the application of the loss appear to be very similar to the rules that are used to calculate a Net Operating Loss.
Line 41 may not be labelled, but it is one of the most important lines on the return. Taxable income on line 43 can never be less than zero. But line 41 accepts negative values. And that’s what drives the entire carryover worksheet.
IRC 1211 and 1212 are among the most recursive texts I have ever seen. This is what makes reading the code so difficult: numerous self-referential functions where the rules seem to fold back on themselves. Here they are, for those that are interested:
1211. Limitation on capital losses
(a) Corporations
In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.
(b) Other taxpayers
In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of—
(1) $3,000 ($1,500 in the case of a married individual filing a separate return), or
(2) the excess of such losses over such gains.
1212. Capital loss carrybacks and carryovers
(a) Corporations
(1) In general
If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the “loss year”), the amount thereof shall be—
<SNIP>
(b) Other taxpayers
(1) In general
If a taxpayer other than a corporation has a net capital loss for any taxable year—
(A) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and
(B) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year.
(2) Treatment of amounts allowed under section 1211 (b)(1) or (2)
(A) In general
For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of—
(i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211 (b), or
(ii) the adjusted taxable income for such taxable year.
(B) Adjusted taxable income
For purposes of subparagraph (A), the term “adjusted taxable income” means taxable income increased by the sum of—
(i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211 (b), and
(ii) the deduction allowed for such year under section 151 or any deduction in lieu thereof.
For purposes of the preceding sentence, any excess of the deductions allowed for the taxable year over the gross income for such year shall be taken into account as negative taxable income.
The basic concept seems to be this: Each year you have to use your capital loss carryover to get the value of line 41 down to negative 3000. If line 41 is already at negative 3000 or lower, without using any of your carryover, then you don't need to use any of it up. But if line 41 has a value of -2999 or higher, you will be required to use any available portion of your loss to reduce line 41 to minus 3000.
If you are unlucky enough to have a zero or a small positive number on line 41, you will have to use up $3000 of your carryover (if you have that much available), even though you probably have a $3400 exemption that is ready and waiting on line 43.
That's about as close to plain English as I think I can get at this hour. LOL
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