Thank you for contacting TurboTax Live! We see that you had a question - about your Life Insurance Policy that has lapsed during the 2021 tax year. We are sorry that you experienced this lapse, and we hope that everything is OK with you and your family!
We thank you for your question! We also thank you for the opportunity to respond to your question!
We see that you are going to have a taxable gain for the 2021 tax year, and based on the lapse of this insurance. We are wondering how you became privy to this information - that this will cause a taxable gain - as life insurance companies have until next January/February to provide you with a confirming 1099 - concerning the lapse of this policy.
Your question specifically was - "Can I write off this taxable gain against my stock tax loss carry forward?"
The answer is: "It Depends!" . . . based on whether the taxable gain - as related to your policy lapse - is classified as a capital gain, or ordinary gain. Since the time has not yet come for the life insurance company to provide you with the confirming 1099 - it is difficult to speculate, at best!
Nonetheless - and with the assumption that the life insurance company has already provided you with confirmation via a telephone call or email correspondence, that the lapse of the policy - does in fact, trigger a capital gain (and not ordinary income), here are the rules concerning what you can offset - in terms of your previous capital loss carryforward, against the capital gain (once you confirm that the life insurance company is classifying the lapse as a capital gain - for tax purposes), and as follows:
In terms of what is available to carry forward from the previous year's tax return filings - we ask you to please look on last year's (2020 tax year) Schedule D, specifically Lines 16 and 21.
If the Line 16 loss amount is greater than the number shown on Line 21 (and we need you - for this exercise - to pretend that they are both positive numbers), you should be getting a capital loss carryover on this year's return for the 2021 tax year.
If you transferred data from last year's TurboTax Live! tax return filings, your capital loss carryovers are already accounted for by TurboTax Live!. We just need you to confirm the number - and confirm that the number was, in fact, transferred over!!
Carryover losses on your investments are first used to offset the current year capital gains if any. You can deduct up to $3,000 in capital losses ($1,500 if you're married filing separately).
Losses beyond that amount can be deducted on future returns as a capital loss carryover until the loss is all used up.
For example, if your net capital loss in 2020 was $7,000 and you're filing as single, if you have no capital gains for 2021 and 2022, you can deduct $3,000 of the loss on your 2020 return, $3,000 on your 2021 return, and the remaining $1,000 on your 2022 return.
Unfortunately, you can't pick and choose which future tax year(s) you wish to apply your carryover to.
Carryovers from this year's return must be applied to next year's return.
If you transferred last year's return over, we automatically include the carryovers.
However, it's always a good idea to keep a written record of your expected carryover amounts to compare against your return.
What is a capital gain?
A capital gain is what the tax law calls the profit you receive when you sell a capital asset, which is property such as stocks, bonds, mutual fund shares and real estate. This does not include your primary residence. Special rules apply to those sales.
What's the difference between a short-term and long-term capital gain?
There's a very big difference. The tax law divides capital gains into two different classes determined by the calendar.
- Short-term gains come from the sale of property owned one year or less and are taxed at your maximum tax rate, as high as 37% in 2021.
- Long-term gains come from the sale of property held more than one year and are taxed at either 0%, 15%, or 20% for 2021.
What is the holding period?
That's the period you own the property before you sell it. When figuring the holding period, the day you buy property does not count, but the day you sell it does.
So, if you bought a stock on April 15, 2020, your holding period began on April 16, 2019. Thus, April 15, 2021 would mark one year of ownership for tax purposes.
- If you sold on April 15, you would have a short-term gain or loss.
- A sale one day later on April 16 would produce long-term tax consequences, since you would have held the asset for more than one year.
How much do I have to pay?
The tax rate you pay in 2021 depends on whether your gain is short-term or long-term.
- Short-term profits are taxed at your maximum tax rate, just like your salary, up to 37% and could even be subject to the additional 3.8% Medicare surtax, depending on your income level.
- Long-term gains are treated much better. Long-term gains are taxed at 15% or 20% except for taxpayers in the 10% or 15% bracket. For low-bracket taxpayers, the long-term capital gains rate is 0%. There are exceptions, of course, since this is tax law.
- Long-term gains on collectibles—such as stamps, antiques and coins—are taxed at 28%, unless you're in the 10% or 15 % or 25% bracket, in which case the 10% or 15% rate or 25% rate applies
- Gains on real estate that are attributable to depreciation—since depreciation deductions reduce your cost basis, they also increase your profit dollar for dollar—are taxed at 25%, unless you're in the 10% or 15% bracket.
- Long-term gains from stock sales by children under age 19—under age 24 if they are students—may not qualify for the 0% rate because of the Kiddie Tax rules. (When these rules apply, the child’s gains may be taxed at the parents’ higher rates.)
The good news is, when you use TurboTax Premier, we'll do the hard work for you to help ensure that your taxes are calculated accurately.
What is a capital loss?
A capital loss is a loss on the sale of a capital asset such as a stock, bond, mutual fund or real estate. As with capital gains, capital losses are divided by the calendar into short- and long-term losses.
Can I deduct my capital losses?
Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.
For example,
- If you have $2,000 of short-term loss and only $1,000 of short-term gain, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one).
- If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income.
- Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income.
- If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500.
We trust and hope that the information contained herein - responds to your question to your satisfaction.
If you have additional questions, you can always schedule a call back or Chat session with one of our Live! Tax Experts.
Thank you for contacting TurboTax Live!
We hope you are able to use this information, options and suggestions in your tax return filings!! Cheers!
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