MAKING APRIL 15TH YOUR FAVORITE DAY
or two of his nonqualified mutual funds to produce a capital loss. Then, within his IRA, we sell the same number of funds. With the proceeds inside the IRA, we purchase funds that were similar to the nonqualified funds. With the proceeds of the sale of the nonqualified funds, we purchase funds that are similar to the IRA funds we sold. This way, he can claim a loss on his taxes without sacrificing his long-term investment results.
When carrying a loss and claiming it on your tax forms, there is one important rule to remember. You can use your entire loss to off- set a capital gain, but if the loss exceeds the gain, you can only use up to $3000 of that remaining loss to offset other income. For instance, using our previous example, and assuming you received dividends and capital gains in cash, you create a $4000 capital loss. On your income taxes, you report that you had a total capital gain of $2750 for the year, but you had a $4000 capital loss. That loss will offset the gain, resulting in your not having to pay capital gains tax on your $2750. The remaining $1250 can be used to offset part of your ordinary income for tax purposes.
However, let’s assume that you report that you only had a capital gain of $850, but that you still had the $4000 loss. You offset the $850 and are left with $3150. You may use up to $3000 to offset your ordinary income on your taxes. You won’t be able to use the remain- ing $150 this year. You can carry over whatever loss remains to the next year’s taxes to use against capital gains and other income. These losses can be carried over indefinitely, meaning that if your loss is $9000, and you use $1000 to offset capital gains, and then use $3000 to offset ordinary income, you’ll be left with $5000. If you don’t use that whole $5000 on the next year’s taxes, whatever is left over can be applied to the following year’s taxes, and so on.
TO ITEMIZE OR NOT TO ITEMIZE?
Many people make the simple mistake of taking the wrong deduction on their tax forms. While for some, taking the standard deduction is the best way, for others, itemizing the deductions is the best alterna- tive. Plus, the most beneficial method for you may change from year to year. That’s why it’s best to calculate your taxes using both the