Can the Roth loss on full distribution be used to reduce investment income subject to the 3.8% tax on investment income? Also is there a way to escape AMT?

[Critter · Accepted solution]

The deductible loss from an IRA is a Sch A deduction and has no bearing on the subjects you mentioned.

https://www.irs.gov/pub/irs-pdf/p529.pdf

[nelson]

The loss on the Roth is a deduction for tax purposes. Why does it not  fit the following description for additional modification to investment income line 7 Form 8960  per IRS  instructions?  
"Gains and losses from the disposition of property not included on line 5a that are taken into account in computing taxable income. For example:
Gain or loss from the disposition of an annuity or life insurance contract. See Line 3—Annuities

[dmertz]

Line 3 refers to nonqualified annuities.  A Roth IRA is not a nonqualified annuity and is explicitly not to be included on line 3.  Therefore, the non-recoverable Roth IRA basis is not includible on line 7 of Form 8960.

[nelson]

But the annuity was only one example of "Gains and losses from the disposition of property not included on line 5a that are taken into account in computing taxable income"  The Roth loss is the disposition of property that is taken into account in commuting taxable income. It seems pretty clear that it should be entered on line 7 unless there is some counter to what I am saying.

[dmertz]

You did not dispose of property that you owned.  The property was owned by the entity that was your Roth IRA.  That property was distributed to you, not disposed of (sold) by you.  (Even if property was distributed to you in-kind from the Roth IRA, you capital basis in the property becomes the value distributed from the Roth IRA.)

[dmertz]

Also note that distribution from your Roth IRA never *adds* to total investment income.  Correspondingly, the non-recoverable Roth IRA basis does not subtract from total investment income.

[nelson]

No.That does not make sense to me. The difference between your input basis to the Roth and the amount dispersed is considered a loss by the IRS and is recognized as Miscellaneous expense on schedule A and therefore also is used in computing taxable income.   As a result, it also becomes a loss from the disposition of property that is taken into account in computing taxable income,
You are correct that when the disposition of a Roth is  at a higher value than basis it is "not" added to investment income and therefore the does not impact investment income. When there is a "loss" however it does impact taxable income.

[nelson]

IRS Publication states "If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis.

Your basis is the total amount of contributions in your Roth IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040

[dmertz]

Part I of Form 8960 is for reporting *investment* income.  Your Roth IRA has nothing to do with your investment income.

[macuser_22]

See IRS Pub 590B (**- last line)
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590b/ch02.html#en_US_2016_publink1000231083">https://www.irs.gov/p...>

Quote:
Recognizing Losses on Investments

If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis.

Your basis is the total amount of contributions in your Roth IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the **alternative minimum tax.**
End Quote

[Critter]

Look at the wording ... you didn't have a "disposition" of an capital asset. You didn't sell anything, you cleared an IRA by taking distributions. What happens inside an IRA is treated differently than the same items in a regular broker's account. If you had sold property or an annuity outside of the IRA then that comes into play on the 8960. Read the line instructions again ...

Line 3—Annuities
Enter the gross income from all annuities  except annuities paid from the following:
Section 401 - Qualified pension,
profit-sharing, and stock bonus plans;
Section 403(a) - Qualified annuity plans
purchased by an employer for an
employee;
Section 403(b) - Annuities purchased
by public schools or Section 501(c)(3)
tax-exempt organizations;
Section 408 - Individual Retirement
Accounts (IRAs) or Annuities;
Section 408A - Roth IRAs;
Section 457(b) - Deferred
compensation plans of a state and local 

Line 5a—Net Gain or Loss From Disposition of Property Calculate and enter the amount of net gain or loss from the disposition of property by combining the following amounts from your properly completed return: Form 1040, lines 13 and 14; Form 1041, lines 4 and 7; Form 1041-QFT, line 3, and the portion of line 4 attributed to ordinary gain/(loss); Form 1040NR, the amounts properly reported on the attachment to your Form 1040NR representing the amounts that you would enter on Form 1040, lines 13 and 14, if you were filing Form 1040 and including net gain or loss only for your period of U.S. residency.

https://www.irs.gov/pub/irs-pdf/i8960.pdf

[nelson]

Their is no concept of an annuity with the complete and one time distribution of a Roth IRA. When you sell a rental property, you go from having a rental property to having cash. When you do a one time  complete distribution from all Roth accounts,, you go from haiving Roth accounts to having cash. If more money was put into the Roth then is distributed out, the IRS recognizes this as a loss. How can you have a loss without a disposition?