Capital Loss Carry Forward

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clock98
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Capital Loss Carry Forward

Post by clock98 » Sat May 21, 2011 7:31 pm

Suppose that in calendar year one only had $8,000 in taxable dividend and interest income and converted about $60,000 from their traditional IRA to a Roth IRA. Throughout the year she sold off shares of the Vanguard Ginnie Mae Fund to live on so their capital gains (including the capital gains distribution the fund paid last year) comprised only a small portion of their "income".

Also suppose that they were sitting on $90,000 worth of capital losses carried forward.

Wouldn't they only be use up enough of the carry forward to offset any gains realized in 2010 + $3,000 against ordinary income?

Someone I know had her taxes done by someone who claims to be a former enrolled agent and her 2010 tax return shows no income tax liability, due to the large carry forward. She had no other deductions beyond the standard deduction and the personal exemption.

Does this sound like her taxes were done properly? It seems to me that much of that $60,000 conversion would be taxable and she'd have a reasonable amount of taxes due for 2010.


Thank you for your help!!
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livesoft
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Post by livesoft » Sat May 21, 2011 7:41 pm

Sounds fine to me. There is the 0% tax bracket which goes up to about $56K for married folks, so a conversion of $60K minus $3,000 is pretty close.

Also remember that return of capital is tax-free.

And even in the 15% tax bracket, the qualified dividends tax rate is 0%, right? Something like 30% to 40% of tax returns have no income tax to pay.

When we retire, we expect to pay no taxes on a 6-figure income.
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JDCPAEsq
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Re: Capital Loss Carry Forward

Post by JDCPAEsq » Sat May 21, 2011 7:46 pm

You're lacking some information to make a judgment. Is this a married person? What is the basis in the IRA? When you say it shows no income tax liability, could this be no liability beyond estimated payments during the year, i.e., no balance due on April 18th? Is the person over 65?

A major explanation could be the basis in the IRA. If the portion of the IRA had a basis of $50,000 there likely would be no tax due.

John

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Post by JDCPAEsq » Sat May 21, 2011 7:49 pm

livesoft wrote: There is the 0% tax bracket which goes up to about $56K for married folks, so a conversion of $60K minus $3,000 is pretty close.
0% bracket on ordinary income? Could you elaborate on this please?
John

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grabiner
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Re: Capital Loss Carry Forward

Post by grabiner » Sat May 21, 2011 7:49 pm

clock98 wrote:Suppose that in calendar year one only had $8,000 in taxable dividend and interest income and converted about $60,000 from their traditional IRA to a Roth IRA.
How much of that conversion is taxable? If many of the traditional IRA contributions were non-deductible, that would explain why no tax is owed.
Someone I know had her taxes done by someone who claims to be a former enrolled agent and her 2010 tax return shows no income tax liability, due to the large carry forward.
But this is impossible. If no tax is owed, it is not due to the large carry-forward, which can only offset $3000 of non-CG income. There might be a lot of tax credits which would reduce the total tax to zero, or most of the conversion could be non-taxable.
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livesoft
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Post by livesoft » Sat May 21, 2011 7:58 pm

JDCPAEsq wrote:
livesoft wrote: There is the 0% tax bracket which goes up to about $56K for married folks, so a conversion of $60K minus $3,000 is pretty close.
0% bracket on ordinary income? Could you elaborate on this please?
John
Any income that is not taxed due to exemptions and standard deduction falls in the 0% tax bracket. There are some tax credits as well that make even more income tax-free.
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livesoft
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Post by livesoft » Sat May 21, 2011 8:28 pm

Try this out at Taxcaster:

Married filing jointly over age 66, not drawing SS.
$50,000 in qualified dividends mostly from foreign funds
$40,000 conversion to a Roth
$3000 capital loss
$1600 foreign tax credit on their dividends


How much tax will they owe on their $90K of income?

For more fun, have them pay $10,000 tuition to get an education credit. Not only will they owe no tax, but they will get a check from the government. :)
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grabiner
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Post by grabiner » Sat May 21, 2011 9:19 pm

livesoft wrote:Try this out at Taxcaster:

Married filing jointly over age 66, not drawing SS.
$50,000 in qualified dividends mostly from foreign funds
$40,000 conversion to a Roth
$3000 capital loss
$1600 foreign tax credit on their dividends
The foreign tax credit won't work out as intended. If they have at least $20,000 in foreign qualified dividends, then for foreign tax credit purposes, they must adjust their qualified dividends, and since all the dividends were taxed at 0%, they get no foreign tax credit. If they have less than $20,000 in qualified dividends, they don't need to reduce their foreign qualified dividends, but the proration will limit the foreign tax credit. With $20,000 in qualified dividends and $87,000 in income, they can only take 20/87 of their $1613 total tax, which is $371, as foreign tax credit. Anything else would be carried over to a future year.

However, I can get the scenario to work:

$50,000 in qualified dividends
$40,000 in Social Security (which is only partly taxed)
$3000 capital loss carryover
$600 foreign tax credit (no need to file Form 1116 for a credit of $600)

Net tax refund: $434 according to Taxcaster.
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clock98
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Re: Capital Loss Carry Forward

Post by clock98 » Sat May 21, 2011 9:46 pm

JDCPAEsq wrote:You're lacking some information to make a judgment. Is this a married person? What is the basis in the IRA? When you say it shows no income tax liability, could this be no liability beyond estimated payments during the year, i.e., no balance due on April 18th? Is the person over 65?

A major explanation could be the basis in the IRA. If the portion of the IRA had a basis of $50,000 there likely would be no tax due.

John
Hi! this is a single person. There is no basis in the traditional IRA. All of the contributions that went into it were pre-tax. (It's a rollover from a pre-tax 403b).

Any foreign taxes / tax credits from the dividends would have been minimal (Less than $100).

Thanks for bringing up these possibilities. I did not think to include them. I'm still baffled as to why more than 2010 capital gains plus $3,000 would have been used up. (This is what I was told.)

Topic Author
clock98
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capital gains carryover

Post by clock98 » Sat May 21, 2011 9:52 pm

I'm just at a loss... No estimated payments were made. Dividends from equities less than $2,000... No basis on the IRA... No Foreign Tax Credit. She is under age 65, but is retired. Most of her assets are in traditional and Roth IRAs at this point. She did not make a withdrawal from the Roth IRA.

Bottom line is that I wasa told that the carry forward was used to offset the income from the conversion. Have any of you heard of someone being able to use a capital loss carry forward to offset realized income from a distribution from a traditional IRA?

Topic Author
clock98
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cap gain carryforward

Post by clock98 » Sat May 21, 2011 9:55 pm

Nope, no education expenses. And I meant to say in my previous merssage that any foreign tax credit would have been minimal... less than $100.

kaneohe
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Post by kaneohe » Sun May 22, 2011 8:34 am

Why don't you tell her you are mystified and think something might be wrong. Maybe she'd share the tax return details w/ you......or at the general idea.

JDCPAEsq
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Post by JDCPAEsq » Sun May 22, 2011 8:46 am

I'm at a loss for any further ideas. Bottom line is that a loss carryover can only be used against capital gains except for $3,000 annually against ordinary income. The Roth conversion is ordinary income, not capital gain, and therefore the loss couldn't have been used against this income.

I suppose a preparer who didn't know what he was doing could have treated the Roth conversion as a capital transaction, i.e., sale, but that would clearly be in error.
John

livesoft
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Post by livesoft » Sun May 22, 2011 9:27 am

I am not mystified. I suspect a lack of a true understanding of what's on the tax return. Publish the tax return and we will have a better idea of what's going on. One cannot always believe what someone says.
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MarkNYC
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Post by MarkNYC » Sun May 22, 2011 9:38 am

livesoft wrote:I suspect a lack of a true understanding of what's on the tax return. Publish the tax return and we will have a better idea of what's going on. One cannot always believe what someone says.
I would agree with this. Perhaps the Roth conversion income was not taxable in 2010, but was deferred to 2011 and 2012.

JoeSchmoe96
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Post by JoeSchmoe96 » Sun May 22, 2011 9:43 am

Maybe the preparer failed to elect out of the automatic deferral to 2011 and 2012.

Topic Author
clock98
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capital loss carryforward

Post by clock98 » Mon May 23, 2011 12:43 am

livesoft wrote:I am not mystified. I suspect a lack of a true understanding of what's on the tax return. Publish the tax return and we will have a better idea of what's going on. One cannot always believe what someone says.
I appreciate everyone's response on this. The messages everyone has posted have helped me more than it is realized. It makes sense to me that everyone is at a loss as to what is going on. After posting, I am even more convinced that either the information being conveyed to me is incorrect, OR the return was prepared incorrectly.

You have helped me more than you know. If I get any updates, I will post it here. Thanks again, everybody!

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