I sold stock at a $15,000 long-term loss in 2009. I never have enough deductions for the long form itemization but was told that I couldn't deduct the losses. I have some long-term gains that could be sold. How much loss can I take a year? How much gains can I sell? Can I itemize if, say I take $10,000 in gains and offset $10,000 in losses and carry over $5,000 into next year?
Whether you have capital gains or losses does not affect whether you can itemize your deductions. The option to itemize is realized if your deductions exceed the standard deduction amount. The standard deduction amount is $5,700 and $11,700 for single and married filers, respectively. If your deductions (like mortgage interest, taxes, contributions) exceed the standard deduction, then you are better off itemizing your deductions than taking the standard deduction that all filers are entitled to take. Doing so will give you a bigger tax writeoff and thus, a lower tax bill.
The rules covering capital gains and losses can be confusing, and that's why it's a good idea to use tax software like TurboTax. But here are the basic rules: All your capital gains and losses (long term and short term) are combined. If you have a net capital loss, then you can use the loss to offset other income. If you have a gain, then you'll be paying tax on it. Long-term capital gains are taxed at lower rates than other income, generally at 15%. Short-term capital gains are taxed at the same rate your other income is taxed (which is generally higher than the long-term capital gains rate).
While selling stock at a loss is painful, it can help you reduce your other income. But your losses can only be used to offset other income to the extent of $3,000 each year. If your loss is more than $3,000, you can carry over the excess to subsequent years, where it will also be used to offset other income (up to $3,000).
One other advantage of using tax software is that you can use it to do "what-if" scenarios. TurboTax helps consumers easily get the biggest refund possible by letting them plug in transactions and see how that transaction affects their tax bottom line. This gives you immediate feedback in terms of whether that transaction makes sense from a tax perspective.
The IRS hasn't responded to letters with documentation of my mistake and for directions on what to do to fix the problem. I'd like to simply split the IRA into two equal halves, but then the government will probably say that I over-contributed to my wife's IRA for this year and assess me for even more money than I already owe.
Answer from Brent Lipschultz, CPA, JD, LLM, partner in the Personal Wealth Advisory practice of Eisner LLP:
This problem is not unique, as there are often misunderstandings between plan custodians and taxpayers regarding the maze of IRS regulations in the IRA area. In this particular case, there is no easy fix, given that you've been contributing funds for both your wife and yourself to a single IRA for a number of years and that it was only in 2007 that the issue came to light.
The custodian is required to notify the IRS on Form 5498 of the contributions made each year. This would allow an individual to take correct action as allowed by the IRS statute and regulations to cure the excess contribution penalty costing 6%.
Excess contributions and earnings attributable for the current year could have been withdrawn prior to the filing of the 2008 tax return (including extensions). Under the current circumstances, I suggest that you seek a private letter ruling from the IRS proposing that they allow the IRA to be severed equally so that each of you would have separate IRAs with equal balances following the severance. This presumes that the contributions were made equally during each of the years, deductible based on the adjusted gross income limitations, and that the taxpayers filed jointly in each of the years of the contribution. The ruling request may be costly but worth the cost of maintaining the tax-exempt status and paying the 6% excess contribution penalty which is assessed each year.
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