EIC and investment income

[Hal_Al]

You say "I just used an example".  Change the details of your example and the answer could be different.

When it comes to taxes, it's never simple. Hence, the complicated worksheet to calculate your investment income for purposes of the EIC. 

Yes, your  $3000 carry over loss reduces your taxable income, for purposes of calculating your income tax.  That is, it reduces  your total income.  But, you're not allowed to target it to your interest income alone.

  However, let's use  a different example: what if you had a $4000 capital gains distribution (still investment income), on a form 1099-Div, instead  of $4000 of interest on a 1099-INT.  Then you would only have $1000 of net investment income and your EIC would not be eliminated.

Huh? How can that be?  Because the capital gains distribution goes on Schedule D, where it is directly reduced by the capital loss carry forward before it ends up on line 6 of form 1040.

That ain't fair? But, it's the law.  Knowing you had that loss carry forward, you shoulda coulda switched your investment from an interest bearing account to a stock mutual fund. 

[d2jpatel]

Thank you! Correct. 

[mirvetpal]

can carryover loss be used against Interest Income?

[Hal_Al]

Q. Can carryover loss be used against Interest Income?

A. No. At least, not directly against interest. It is applied to your total income, including your interest income.   It also can not be used directly against dividends, even so called "qualified dividends". 

It can be used directly against capital gains distributions, from mutual funds, shown in box 2a of a 1099-DIv. TT will handle that automatically. 

[BrittanyS]

Yes, but there are limits to how the carry-over losses can be used.  Losses must be applied to gains of the same type first, and then the following applies:

• 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 income.
• If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500.

What is a capital loss carryover?

Capital Gains and Losses

@mirvetpal