Investment Loss and Your Taxes
When it comes to tax and investment income, most people think about how much money they have earned over the past year. Unfortunately, this is not always how things work out. There is a good chance, especially as of late, that you lost money on your investments. Believe it or not, you may be able to use these losses to your advantage when filing your tax return.
If you sold stocks and/or bonds for less than what you paid, you may qualify for a capital loss income deduction. This can help lower your investment tax liability, and in turn save you money. After all, if you have to pay taxes on the money you earn you should be able to take a tax deduction if you have lost money.
What is a capital loss? This happens when you sell an asset, such as a stock or bond, for less than its original cost.
Now that you know the basics, it should be simple to understand capital losses and how they apply to your investment tax situation. Capital losses can be used with no limits to reduce your overall amount of capital gains. That being said, there is a limit on the amount by which your ordinary income can be reduced ― the cap is $1,500 if married filing separately or $3,000 if filing a joint return. In short, this means that the amount you enter on Line 13 of Tax Form 1040 cannot be in excess of $3,000. This is the case even if you lost more than this during a given tax year.
Do I have the right to carry over losses which exceed the $3,000 limit? In most cases, the answer is yes. Take for example an investor with a capital loss of $5,000. While only $3,000 can be deducted for that year, the remaining $2,000 can be carried forward. For this reason, you must keep track of all your investments, including capital gains and losses from previous tax years. You don’t want to miss out on the full capital loss income tax deduction because you did not keep good records.
Taxes and investment income always play off one another. This holds true when you are earning money, and as noted above, when you lose out. While you never want to lose money on an investment, if you do, consider the capital loss income tax deduction.