What is the best way to handle large investment losses on my taxes?

Question

I really screwed up and have over $50,000 in investment losses this year! Our gross income from salaries for this year will only be around $50,000.

In addition, I lost $5000 in my Roth IRA. I just read that I can only deduct $3,000 in investment losses. Does that include IRAs PLUS regular investment activities?

Also, will any interest I accrue via CDs or dividends from stocks or mutual funds essentially be tax-free now since I have such a large investment loss? Or is that a different category?

Please help, I really screwed up this year and am hoping somebody has some suggestions to make this better. Thanks in advance!

Answer 1

Actually, you have lots of questions here. First, investment losses are to be offset against investment gains (that includes any capital gain distributions from your mutual funds), but no greater than $3000 per year can be deducted on your tax return. The balance of the losses can be carried forward to future tax years, but no greater than $3000 can be written off in any year.

Your Roth losses aren't deductible since they're in a tax deferred investment.

As far as your other unearned income being tax free, only insofar as it's no greater than the $3000 of losses. Investment losses must be offset against investment gains, not other unearned income like dividends, interest, or earned income like wages.

Hopefully, your next investment will give you a $47,000 gain and you can get rid of all of your carryforward losses next year!

Answer 2

You can only deduct $3000 against your ative income (salary) even you filed joint return. Unused capital loss can be carried forward forever.

Capital gain are reported in the form 1040 schedule D. Dividends and CDs are report in form 1040 schedule B, they are not deductable against your capital loss.

Dividend is included in your gross income unless the companies have no E & P which means they declear a dividend to return the share capital to the shareholder, then you dont have to pay any tax intil your basis of the investment goes to zero.

If you are the original shareholder of a company and it become worthless, you can treat the stock's basis as oridinary loss - it is so call Section 1244 worthless stock. I am not quite sure about the amount and the exact rule of this particular section, you should consult your tax advisor.

About the IRA, most IRA is not taxable until you withdraw from the account so the loss is not deductable against your gross income in most cases.

And you have to know there are long term and short term capital gain and loss which they cannot deduct against each other.

Answer 3

you can deduct your losses against any gains you have. if you have no gains, you can deduct $3000 per year from your income. interest and dividends are taxed differently and can not be offset by capital losses. my best advice to you would be to consult with a competent financial advisor to help you make the right choices and avoid such large losses in the future.

Answer 4

Go to your local IRS-Taxpayer Assistance Division and they can help you out,and it's free.Just bring your paperwork and some ID.