Why does Turbo Tax "use up" my loss carryover if I am in the 0% bracket for capital gains and dividends?

[kknorthon]

I have a large capital loss carryover and have been in the 15% tax bracket for years so my cap gains and dividends have been taxed at 0%.  It seems those are two separate "advantages".  I want to capture some gains this year, (they should be taxed at 0%) but Turbo Tax is still "using up" my loss carryover anyway.  Is that correct?

[macuser_22]

Capital loss carryovers if no capital gains to offset must apply $3,000 each year to offset ordinary income.  Carry overs cannot skip a year or they will be forfeited.   Is that what you mean by  "using up"?

[kknorthon]

In 2016 I had a capital loss carryover of $80,000.  I had $10,000 in capital gains.  It looks like my carryover to 2017 will be $67,000.  Since I am in the 15% tax bracket,  I don't understand why it reduces the carryover by $10,000 in addition to the $3,000 if the $10,000 isn't taxable?  I see that as "using up" my loss carryover by capital gains that aren't taxable.  I hope I am explaining this correctly.

[kknorthon]

That answers it.  Thank you.

[VolvoGirl]

If you have investment sale losses, after you subtract the losses from your gains you can only deduct up to 3,000 per year. You can only deduct up to 3,000 (1,500 MFS) loss per year after any gains you have.  So if you have a lot of current gains you can use up the loss.  The rest you will have to carryover until it is used up.

So actually it's a good thing.  So you can take more gains without tax to use up the loss.  Usually the question we get is why can't you take the full loss.  Not why it uses up the loss.

[kknorthon]

Yes, it is a good thing, but when I take gains they aren't taxable anyway.  That is why I was confused that the carryover was still being reduced.  I would like to save my carryover for a time when my gains ARE taxable.  But according to the answer by Rick19744, if he is correct, that is not a possibility.

[VolvoGirl]

You have to report the carryover every year until it's used up.  You can't skip a year.  Even if you don't report it on your return you have to reduce it by the 3,000 (1,500 MFS) when you carry it over to next year.  You can't choose when to use it.

This is from the IRS Pub 550 page 69 near bottom of first column:
"When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year. "

Here is pub 550…  <a rel="nofollow" target="_blank" href="http://www.irs.gov/pub/irs-pdf/p550.pdf">http://www.irs.gov/pub/irs-pdf/p550.pdf</a>

BUT......If you have a negative AGI or negative taxable income it will show up on 1040 line 13 BUT it won't reduce the carryover to the next year.

[kknorthon]

Thank you, I wasn't concerned about the $3,000.  I was concerned that it reduced the carryover by the $10,000 in my example, even though that $10,000 was not taxable in the 15% bracket.

[fanfare]

See the capital loss worksheet 4-1  in IRS Pub 550

[kknorthon]

I am not seeing a "capital loss worksheet" in IRS Pub 550, can you reference a page number?

[VolvoGirl]

Yes I said page 69.

[kknorthon]

Thank you, now I see the worksheet.  I understand how it is done, I just did not understand why non-taxable gains still reduce the carryover.  It has nothing to do with the $3K.  I believe Rick19744 has understood my question most and cleared that up for me.   I recommend his answer.  Thanks everyone!

[Rick19744 · Accepted solution]

The way it works is that capital losses offset capital gains plus $3,000, if available.  So what the system is doing is correct.
Your tax bracket has nothing to do with how capital gains and losses interact.  The ability for a taxpayer to determine when and how capital losses get utilized would be fraught for abuse and that is why there are regulations that are in place to avoid that abuse.