Capital-loss deductions are a great way to take the sting out of investment losses and save some money on your taxes at the same time.
A capital loss is the loss of money incurred when a capital asset (such as investment or real estate) decreases in value and is then sold.
When you have a capital loss, you must first use it to reduce any capital gains you have on other investments, and there is no dollar limit for doing so. When your losses are bigger than your gains, you have capital losses left over; these capital losses can be deducted from your income by up to $3,000 per year (or $1,500 if you’re married and filing separately from your spouse).
If your losses exceed $3,000, you can carry them forward to future years indefinitely; there is no limit on how much you can deduct in capital losses, other than the annual maximum of $3,000.
For example, if you have $50,000 in annual income for 2013 and $5,000 in capital losses, you can deduct $3,000 of those losses in 2013 (reducing your taxable income to $47,000). You can then carry the remaining $2,000 forward to the following year, when you can deduct it from your 2014 income.
Investors often ask if the $3,000 annual maximum will be increased, and the answer is no – not in the foreseeable future. The issue is not receiving any attention in Congress. Why not consider capital losses for your 2013 tax return, and turn your losses into gains?
The tax information in this article is merely a summary of our understanding and interpretation of the current laws and is not exhaustive. Please talk with your advisor for advice about your individual situation.