Capital Loss Carryover: Use it or save it?

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Capital Loss Carryover: Use it or save it?

Postby Ozonewanderer » Sat Apr 06, 2013 1:26 am

I have a lot (six figures) of Capital Loss Carryover - both short term and long term. I will probably die before I could use it up in annual $3,000 deductions against my income. To rebalance to my AA I would like to sell some stock fund/ETF that have gains. I could sell some stock fund in my Roth IRA and save the capital loss carryover, but I would prefer to let the stock fund grow there since I can ultimately withdraw with no taxes. I can also sell some stock fund in my taxable account, but I will be using up some capital loss carryover. Do I care? I am in the 25% marginal tax bracket if that makes a difference.

Some instinct tells me that it would be best to preserve the capital loss carryover for as long as I can. But a contrary intuition tells me that the sooner I use the loss carryover the better because its value (as measured in purchasing power) is decreasing over time due to inflation. That is, $10,000 of carryover loss used now is worth more than $10,000 of loss used 10 years from now.

Any thoughts? Thanks.
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Re: Capital Loss Carryover: Use it or save it?

Postby kaneohe » Sat Apr 06, 2013 4:38 am

You might need to model your situation since it might depend on your specific assumptions. Leaving stocks in the Roth might grow faster than in taxable with loss carryover but on the other side, bonds is taxable will yield less than bonds in Roth .
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Re: Capital Loss Carryover: Use it or save it?

Postby Ozonewanderer » Sat Apr 06, 2013 11:10 am

kaneohe wrote:You might need to model your situation since it might depend on your specific assumptions. Leaving stocks in the Roth might grow faster than in taxable with loss carryover but on the other side, bonds is taxable will yield less than bonds in Roth .

Almost all of my bonds are in tax deferred retirement accounts.
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Re: Capital Loss Carryover: Use it or save it?

Postby tfb » Sat Apr 06, 2013 11:49 am

Ozonewanderer wrote:I will probably die before I could use it up in annual $3,000 deductions against my income.

If you are sure you will still have loss carryover when you die, you should use it now. Suppose your have a position worth $20k, with $10k basis and $10k unrealized gains. If you sell and redeploy, your basis in the new position now becomes $20k. If $20k grows to $200k by the time you die, your heirs get $200k with step-up in basis. If you don't sell, and the $20k grows to $180k because the position is inferior (high expenses, wrong fund, ...), your heirs get only $180k with step-up in basis when your saved loss carryover dies with you.
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Re: Capital Loss Carryover: Use it or save it?

Postby Artsdoctor » Sat Apr 06, 2013 12:28 pm

Ozone,

How old are you? What makes you think that you won't be able to off-set those losses with gains in the future? Capital loss carryovers are extremely valuable. I also have six-digit carryover losses from when I tax-loss harvested in 2008, and I'm not to not show any capital gain on my Schedule D for many, many years to come.

Over course, if you are 90 years old or have a terminal illness, that's a different story!

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Re: Capital Loss Carryover: Use it or save it?

Postby Ozonewanderer » Sat Apr 06, 2013 12:55 pm

Artsdoctor wrote:Ozone,

How old are you? What makes you think that you won't be able to off-set those losses with gains in the future? Capital loss carryovers are extremely valuable. I also have six-digit carryover losses from when I tax-loss harvested in 2008, and I'm not to not show any capital gain on my Schedule D for many, many years to come.

Over course, if you are 90 years old or have a terminal illness, that's a different story!

Artsdoctor

I am only 63 so I do think I will have opportunity to use the carryover losses in the future. Hence my question: "Use it or save it?"

What is the rationale that using the carryover losses is better later than sooner? That's the question I am struggling with.
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Re: Capital Loss Carryover: Use it or save it?

Postby adam1712 » Sat Apr 06, 2013 12:58 pm

What are you planning to rebalance into in your taxable account when you sell stocks? It's not clear what type of rebalancing you're trying to do. If you're selling stocks to buy bonds in taxable, that's likely to be tax inefficient over time.
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Re: Capital Loss Carryover: Use it or save it?

Postby Scooter57 » Sat Apr 06, 2013 1:37 pm

Your tax bracket now as opposed to later matters too. The losses are more valuable written off against money thst would have been taxed in a high bracket.
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Re: Capital Loss Carryover: Use it or save it?

Postby Artsdoctor » Sat Apr 06, 2013 1:39 pm

I try to plan for the future but make decisions financially based on what the law allows for me do now.

Last year, my capital gains rate (if I had any net capital gain) was 24.3% (federal and state). This year, it's more than 36.1% (federal and state). Consequently, those losses just became more valuable to me. I will continue to tax-loss harvest as long as I can. If I die never paying a cent in capital gains, I won't leave behind a lot of tears.

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Re: Capital Loss Carryover: Use it or save it?

Postby tfb » Sat Apr 06, 2013 2:56 pm

Scooter57 wrote:Your tax bracket now as opposed to later matters too. The losses are more valuable written off against money thst would have been taxed in a high bracket.

As long as it's used to offset capital gains, the rate doesn't matter. If you use $10k now, your basis will be higher by $10k. When you sell in the future, you gains will be lower by $10k due to the higher basis. If you save the $10k now, when you sell in the future, your gains will be reduced by $10k you saved. Either way it'll be the same.
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Re: Capital Loss Carryover: Use it or save it?

Postby Scooter57 » Sun Apr 07, 2013 11:05 am

What I meant was that if I'm in the 35% bracket this year and am able to use losses to offset capital gains that would otherwise be taxed at 20% I am saving more than if I wait until retirement when I am in the 25% bracket where the same gain would only be taxed at 15% or I'm in the 15% bracket when my capital gains aren't taxed.

Figuring out the tax consequences of selling is something I'm just starting to get my head around, but it's important if you have significant gains and losses.

Not understanding all the ramifications, for example, I created capital gains last year which, though they were partially offset by losses, combined with an unexpectedly good year in my business to push me into the income range that makes my Medicare Part B costs leap this year. Had I split my stock sales (and gains) over the two years I wouldn't have had that problem.
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Re: Capital Loss Carryover: Use it or save it?

Postby hollowcave2 » Sun Apr 07, 2013 11:09 am

Someone will have to enlighten me. Does the IRS give you a choice as to when to use your carryover? I thought you just filled out the worksheet. Seems to me that if you skip years and then claim the carryover loss later, that's a good reason for an audit.

But in the meantime, I'm sure they would appreciate the extra taxes you'll send them if you don't claim it.
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Re: Capital Loss Carryover: Use it or save it?

Postby Default User BR » Sun Apr 07, 2013 12:25 pm

hollowcave2 wrote:Someone will have to enlighten me. Does the IRS give you a choice as to when to use your carryover? I thought you just filled out the worksheet. Seems to me that if you skip years and then claim the carryover loss later, that's a good reason for an audit.

In this case, the OP is asking whether to realize capital gains to use up some of the carry-over. Using the losses isn't a choice when there are gains, but the decision to realize the gains is a choice.


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Re: Capital Loss Carryover: Use it or save it?

Postby tfb » Sun Apr 07, 2013 12:38 pm

Scooter57 wrote:What I meant was that if I'm in the 35% bracket this year and am able to use losses to offset capital gains that would otherwise be taxed at 20% I am saving more than if I wait until retirement when I am in the 25% bracket where the same gain would only be taxed at 15% or I'm in the 15% bracket when my capital gains aren't taxed.

Still doesn't matter. If you don't sell today, the unrealized gains are carried till you retire when they won't be taxed. Either way they aren't taxed: offset by loss carryover today, or offset by loss carryover years from now.
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Re: Capital Loss Carryover: Use it or save it?

Postby Artsdoctor » Sun Apr 07, 2013 6:33 pm

There will come a time when we all will have to pay capital gains tax--unless we die prematurely or are just horrible investors.

For me--and this may be different for others--it's all about having some sort of control over when I'm going to pay those taxes. Right now, I have a lot of capital losses that I'm carrying because I TLHed so much in 2008. Like Scooter, I had capital gains last year which were unusual for me (I decided to sell a mutual fund that no longer was appropriate for my needs). Fortunately, my capital loss carryover allowed me to make that sale but still show my classic -$3000 loss on my 1040. With any luck, I will continue to have the -$3000 from Schedule D for many years to come.

I cannot know what my capital gains rate will be in retirement. My combined federal and state capital gains rate right now is more than 36% so my current capital loss carryover gives me freedom to play if I need to.

One day, I'll eventually have to pay capital gains. I'm hoping those rates will be less than today's but I can't know that. Right now, I do know that I'm enjoying that cushion.

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Re: Capital Loss Carryover: Use it or save it?

Postby Ozonewanderer » Sun Apr 07, 2013 6:36 pm

adam1712 wrote:What are you planning to rebalance into in your taxable account when you sell stocks? It's not clear what type of rebalancing you're trying to do. If you're selling stocks to buy bonds in taxable, that's likely to be tax inefficient over time.

I am selling stocks to get back to my target AA. I'm a little stock heavy. I may put the money into Muni bond fund or cash. I don't think that influences whether to avoid using my carryover capital losses, does it?
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Re: Capital Loss Carryover: Use it or save it?

Postby Artsdoctor » Sun Apr 07, 2013 6:50 pm

Ozone,

Is there any possible way that you can rebalance using a tax-deferred or Roth account?

If you're way off base with your asset allocation and there's no other way to take some money off the table, go ahead. But I really would try very hard not to tinker.

I have no idea what sort of money you're talking about here. In my taxable account, I've been taking all of my equity mutual fund dividends and buying municipal bond shares.

But everyone's case is different. I really love having options and a large capital loss carryover gives me those options.

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Re: Capital Loss Carryover: Use it or save it?

Postby adam1712 » Sun Apr 07, 2013 7:17 pm

Ozonewanderer wrote:I am selling stocks to get back to my target AA. I'm a little stock heavy. I may put the money into Muni bond fund or cash. I don't think that influences whether to avoid using my carryover capital losses, does it?


Just know that the Muni bond fund will perform worse than a regular bond fund held in a Roth. As people have pointed out, there's really no other reason to use your carryover capital losses unless it improves your fund placement. If you have $100,000 in capital losses then the first $100,000 in capital gains will not have taxes. It doesn't matter when you do it or what the tax rate is. The only real mistake you can make is to use up your capital losses completely if it can be avoided and start losing out on getting to save on the taxes of $3000 of ordinary income. I don't know why you'd want to risk that for what I see as no benefit.
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Re: Capital Loss Carryover: Use it or save it?

Postby Artsdoctor » Sun Apr 07, 2013 7:31 pm

"Just know that the Muni bond fund will perform worse than a regular bond fund held in a Roth."

Adam,

Is that true? I agree that it's possible . . .

But the average annual return for 3 years ending 3/31/13 for Total Bond Fund was 5.49% whereas the CA Intermediate-Term Fund was 6.28%. As reported by Vanguard, if I'm reading their website correctly.

And that's not taking into consideration tax issues.

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Re: Capital Loss Carryover: Use it or save it?

Postby Ozonewanderer » Sun Apr 07, 2013 9:29 pm

Thank you all for your thoughts. I had already decided that I want to take some money out of the market (not a large % of my portfolio). I am not trying to use my carryover losses for the heck of it, and I do have the option of selling some funds in a Roth IRA instead. I was trying to determine if there is a compelling reason not to use the carryover losses and so far I don't see one. I see a better rationale for letting my stock fund continue to grow in the Roth because its growth and withdrawals will be tax free. I will also only be using a small % of my carryover losses so I think that's what I am going to do. This discussion has helped me, so thanks!
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Re: Capital Loss Carryover: Use it or save it?

Postby Watty » Sun Apr 07, 2013 11:14 pm

In addition to your stocks you should also consider where you are at with capital gains for any real estate you own.

For your primary residence there is a homeowners capital gains tax exclusion but it is possible to have more capital gains in your house than the exclusion amount.

If you own a second house any capital gains on that might be an issue too.
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Re: Capital Loss Carryover: Use it or save it?

Postby adam1712 » Sun Apr 07, 2013 11:32 pm

Artsdoctor wrote:"Just know that the Muni bond fund will perform worse than a regular bond fund held in a Roth."

Adam,

Is that true? I agree that it's possible . . .

But the average annual return for 3 years ending 3/31/13 for Total Bond Fund was 5.49% whereas the CA Intermediate-Term Fund was 6.28%. As reported by Vanguard, if I'm reading their website correctly.

And that's not taking into consideration tax issues.

Artsdoctor


I should have been more precise in what I called a regular bond fund. I have Vanguard Intermediate-Term Bond Fund returning 8.40% over the last 3 years while the CA Intermediate-Term Fund was 6.28%. I think that is a more apples to apples comparison. I do think you may be right that the value people place on the relative safety of things could affect the performance of a Muni fund to other funds. I think on average though a person who has the tax protected space is better to not use a tax exempt bond fund since the people who need it for tax savings are willing to pay a premium for it and give up a percentage of the return.
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Re: Capital Loss Carryover: Use it or save it?

Postby adam1712 » Sun Apr 07, 2013 11:37 pm

Ozonewanderer wrote:Thank you all for your thoughts. I had already decided that I want to take some money out of the market (not a large % of my portfolio). I am not trying to use my carryover losses for the heck of it, and I do have the option of selling some funds in a Roth IRA instead. I was trying to determine if there is a compelling reason not to use the carryover losses and so far I don't see one. I see a better rationale for letting my stock fund continue to grow in the Roth because its growth and withdrawals will be tax free. I will also only be using a small % of my carryover losses so I think that's what I am going to do. This discussion has helped me, so thanks!


I know you've made your decision, but I still feel compelled to make one other point. If you don't think you'll use up your capital losses before you die than the growth of stocks in a taxable account is tax free. It's your money and I definitely encourage you to rebalance and sell some stocks. I just think it makes sense to do it in the Roth account.
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Re: Capital Loss Carryover: Use it or save it?

Postby cheesepep » Mon Apr 08, 2013 12:51 am

I just think it is weird that the deduction for a capital loss is $3,000 now and was $3,000 at least 5 years ago. That figure should be $5,000 minimum.
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Re: Capital Loss Carryover: Use it or save it?

Postby Ozonewanderer » Mon Apr 08, 2013 12:57 am

cheesepep wrote:I just think it is weird that the deduction for a capital loss is $3,000 now and was $3,000 at least 5 years ago. That figure should be $5,000 minimum.

This seems related to my point that if I use up $10,000 of carryover capital loss to offset $10,000 of gains now, that the finacial benefit to me is greater than using that same amount of loss to offset $10k of gains say ten years later. The $10k isn't worth as much due to inflation. No?
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Re: Capital Loss Carryover: Use it or save it?

Postby Artsdoctor » Mon Apr 08, 2013 12:58 am

Ozone: Your point is well-taken. Using up a bit of your capital losses could be justified, and then just continue to tax-loss harvest. You'll continue to have your losses over time that you can play with.

Adam: The intermediate-term bond fund you mention is 50% treasuries with a duration of 6.5 years. I don't know this for sure, but I'm going to guess that the CA intermediate-term muni fund will be less risky and will outperform your VBILX over the next few years in tax-adjusted returns. Let's put it on the calendar and check back in 5 years.

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Re: Capital Loss Carryover: Use it or save it?

Postby Artsdoctor » Mon Apr 08, 2013 1:16 am

Ozone,

Sorry, the posts crossed with a simultaneous Submit button.

There's a big difference between using a TOTAL Carryover Loss of $10,000 to balance a gain of $10,000. At the end of the year, you have no carryover losses and that leaves you exposed the next year if you have to sell. You never want to feel trapped and you never want to be surprised (capital gains from a business as described earlier, for example). You want options.

If you have a Carryover Loss of $300,000 and you want to sell $50,000 in funds, that's no big deal. You're essentially playing in negative territory and the immediate ramification will be zero.

There are some pretty good posters on the board, however, that have been trapped in actively managed funds and can't get out without selling at a major gain. The manager moves on and you're stuck: remember Fidelity Magellan? That's the time when huge carryover losses can come into play, for example.

In the ideal world, anyone in the accumulation phase of investing should never have a significant capital gain on their tax form if they've been tax-loss harvesting correctly. You usually want to see that -$3,000 on your 1040 unless there are extenuating circumstances. In the retirement phase, that's a different story, of course.

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Re: Capital Loss Carryover: Use it or save it?

Postby Ozonewanderer » Mon Apr 08, 2013 9:09 am

Artsdoctor wrote: In the ideal world, anyone in the accumulation phase of investing should never have a significant capital gain on their tax form if they've been tax-loss harvesting correctly. You usually want to see that -$3,000 on your 1040 unless there are extenuating circumstances. In the retirement phase, that's a different story, of course.

Artsdoctor

Seems to me in the ideal world one would never have to harvest a loss! :D

What I take away from all of this discussion is that there is no single rule of thumb one can rely upon regarding use of carryover losses. The answer, as with so many questions, is: "It depends..."
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Re: Capital Loss Carryover: Use it or save it?

Postby adam1712 » Mon Apr 08, 2013 5:59 pm

Ozonewanderer wrote:This seems related to my point that if I use up $10,000 of carryover capital loss to offset $10,000 of gains now, that the finacial benefit to me is greater than using that same amount of loss to offset $10k of gains say ten years later. The $10k isn't worth as much due to inflation. No?


This idea is simply not true. The remaining amount of money you have to pay capital gains on is exactly the same.
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Re: Capital Loss Carryover: Use it or save it?

Postby adam1712 » Mon Apr 08, 2013 6:04 pm

Artsdoctor wrote:
Adam: The intermediate-term bond fund you mention is 50% treasuries with a duration of 6.5 years. I don't know this for sure, but I'm going to guess that the CA intermediate-term muni fund will be less risky and will outperform your VBILX over the next few years in tax-adjusted returns. Let's put it on the calendar and check back in 5 years.



Fair enough, there's no perfect direct comparison. Although I don't know what you mean by tax-adjusted returns. I wouldn't recommend that someone hold an intermediate-term bond fund in a taxable account. I also wouldn't recommend that someone hold CA intermediate-term muni fund in a Roth, but I'm sensing that maybe you would?
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Re: Capital Loss Carryover: Use it or save it?

Postby Artsdoctor » Mon Apr 08, 2013 6:57 pm

Adam,

Sorry if it was confusing.

Munis belong in a taxable account, as I'm sure you know. The intermediate term bond fund can go either place depending on your tax situation.

Munis have had an unusual run up and their yields are unusually high compared to treasuries. This inversion has persisted longer than I would have expected but the Fed's forcing down of interest rates has really made rates behave unnaturally. Where things will go from here is anyone's guess.

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Re: Capital Loss Carryover: Use it or save it?

Postby archbish99 » Mon Apr 08, 2013 7:39 pm

Ozonewanderer wrote:
cheesepep wrote:I just think it is weird that the deduction for a capital loss is $3,000 now and was $3,000 at least 5 years ago. That figure should be $5,000 minimum.

This seems related to my point that if I use up $10,000 of carryover capital loss to offset $10,000 of gains now, that the finacial benefit to me is greater than using that same amount of loss to offset $10k of gains say ten years later. The $10k isn't worth as much due to inflation. No?

It depends which scenario you're comparing against. Ordinary income is always at a higher rate than capital gains. If, by delaying the capital gain, you can use the loss against ordinary income instead, then it's probably to your benefit to delay the gain. On the other hand, if the loss is going to be offsetting a capital gain either way, go ahead and do it.

However, the adage to avoid letting the tax tail wag the investment dog applies here, too -- even over the last month, you've quite possibly seen that stock position move as much as the taxes under discussion. If, by delaying the gain, you remain over-exposed to equities vs. what your IPS calls for, you risk a higher loss should the market have a drop.

Personally, if your AA is out of line, correct it and let the taxes sort themselves out. Only if it's already close to the end of the year, or close to the ST/LT holding mark, is it worth stressing over whether to hold off until you get past an artificial deadline created by the tax code.
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Re: Capital Loss Carryover: Use it or save it?

Postby Ozonewanderer » Mon Apr 08, 2013 8:50 pm

Archbishop,
Sounds like an intelligent, rational conclusion. Any differences between strategies seems likely to be minor.
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