What if you didn't document tax loss carryforward every year ?

[davejunkmail123]

Friend had a large LT capital loss in 2006. Used some of the loss in 2007. Never used or needed the remaining loss since then.

Now he will have a capital gain this year - and wants to use 2006 loss remaining. Reading Schedule D instructions, appears the loss can be carried forward indefinitely. 

QUESTION: He made no documentation of the "available carry forward" on 2008 through 2014 tax returns (because wasn't needed).

Is this a problem ? I'm not sure if there was something he should have done. The Schedule D instructions have a "Capital Loss Carryover Worksheet" - but this says "Keep for your records". Hopefully just the old return and supporting documentation is sufficient.

I think he used Turbotax, but in 2008 did not "import info from previous year". But the old lost is there and fully documented.  Thanks !

[Critter1]

What do you mean by "needed the remaining loss since then"  ... was he not required to file a return for any of those years?

[Critter1]

Hal has a good answer here  ... you will need to at least compute the loss carryover each year even if you don't file a return:
<a href="https://ttlc.intuit.com/questions/2566411-do-i-have-to-use-a-capital-loss-carryforward-even-if-i-hav..." rel="nofollow" target="_blank">https://ttlc.intuit.com/questions/2566411-do-i-have-to-use-a-capital-loss-carryforward-even-if-i-hav...>

[davejunkmail123]

He only had $15k /year of SS income in those years.  I think he was required to file a return.  He just didn't use any of capital loss carry forward.

[SweetieJean]

If Social Security was his only income, he did not need to file a return.

[rjs · Accepted solution]

Part of the carried over loss is used to offset ordinary income (not capital gains) each year. That's why Critter had trouble understanding your statement that your friend "never used or needed the remaining loss." "Is this a problem?" Yes. "Something he should have done" is carry over the loss each year and show it on his tax return. It's not "fully documented" if he didn't do that.

He cannot just take the loss that remained in 2007 and use that amount on his 2015 tax return. He has to recalculate each year's tax return from 2008 through 2014 with the loss carryover to determine how much is still remaining after 2014. The capital loss carryover from 2014 is what he can use on his 2015 tax return.

He should file amended returns for 2012, 2013, and 2014 if there is still a carryover in those years. He may get additional refunds because the loss carryover will reduce his taxable income. His tax might have been lower in 2008 through 2011 if he had properly carried over the loss, but it's too late to get refunds for years earlier than 2012 now.

[VolvoGirl]

Maybe he can still carryover the full amount?  Does this apply if you have zero AGI (well he would if he took the -3,000 each year)?  If you have a negative AGI or negative taxable income read Pub 550 page 69 on Figuring your Carryover.  So even though it shows it on 1040 line 13 it doesn't reduce the carryover to the next year.
 <a href="http://www.irs.gov/pub/irs-pdf/p550.pdf" rel="nofollow" target="_blank">http://www.irs.gov/pub/irs-pdf/p550.pdf</a>

[davejunkmail123]

Thanks for comments.    So if the original loss was $100k,  he should have carried forward $3k/year against ordinary income for years 2008 - 2014 (7 years).  Four of those years, 2008-2011 are too late to amend, so he loses $3k of losses for those years.  For years 2012-2014, he should amend those returns, claim the $3k carryforward against ordinary income.

So I am hoping he can use $79k ($100k - $21k discussed above) past unused losses against a gain in 2015 ?

Thanks so much !

[SweetieJean]

As indicated above, if his only income was nontaxable Social Security,  there is no ordinary income to offset those years.

[rjs]

Don't just assume that $3,000 would be used each year. Do the calculations. As VolvoGirl and SweetieJean suggested, it's possible that in some years none of the loss got used and the full remaining amount got carried over.

[VolvoGirl]

And it might depend on how you are filing.  Like Single, Married Joint or Married filing Separately.  If MFS you only get to take 1,500 loss per year.

[tdog66]

But I think EVERYBODY is forgetting that he failed to claim the 3K losses for each year subsequent to 2007. Since IRS rules force you to claim your maximum capital losses EACH YEAR in order to carry it forward how can he carry ANYTHING forward legally since he failed to report the losses in 2008, 2009, 2010, and 2011 ??? Yes he can amend his 2012-2014 tax returns but he already failed to claim the 3K in 2008-2011. This will actually PRECLUDE him from amending his return to reflect losses since the 2008 thru 2011 returns cannot reflect his losses OR his possible GAINS. The possible GAINS pose a problem to his losses. This is why the IRS rules FORCE you to use your losses EACH year. You cannot skip a year, and in his case SEVERAL years and then decide later that you need to use them. You can try to file and maybe not get caught but it is ILLEGAL. If you skip a year and do not claim your losses one year then you are not eligible to suddenly pop up almost 10 years later and go OH YEAH I had losses 10 years ago. I love turbo tax but they are not giving correct info on this one.

[dmertz]

For each year, if all income other than the $15k of Social Security income totals less than the standard deduction amount for that year and there were no capital gains in those years to which the carryover would have to be applied, it appears that the entire LT capital loss will have carried forward.  The way to know for sure is to create a pro forma tax return for each of those years, as rjs suggests.

[Critter1]

My original post covered that situation ....

Hal has a good answer here  ... you will need to at least compute the loss carryover each year even if you don't file a return:
<a href="https://ttlc.intuit.com/questions/2566411-do-i-have-to-use-a-capital-loss-carryforward-even-if-i-hav..." rel="nofollow" target="_blank">https://ttlc.intuit.com/questions/2566411-do-i-have-to-use-a-capital-loss-carryforward-even-if-i-hav...>

[rjs]

@tdog66 - Nothing prevents him from amending his 2008 through 2011 returns, but he doesn't have to and there is no benefit in doing so. There is a statute of limitations for tax returns. Once the statute of limitations has run out, the return is considered "closed." That means you can no longer get a refund for that year, and the IRS can no longer audit the return (except in the case of a major understatement of income or outright fraud). But you can amend returns as far back as you care to. You just can't get refunds anymore.

Without actually filing amended returns, he can still recalculate his taxes for those years in order to come up with the correct capital loss carryover for 2012 and later. That is what we are saying that he should do, and it is perfectly legal. His failure to use the carryover in 2008 - 2011 does not "preclude him from amending his returns" for the years that are still open. In fact, he is actually required to amend his returns for 2012 through 2014 because the returns he filed for those years are incorrect, and those years are still open. We are not forgetting that he didn't use the carryover in 2008 through 2011. Recalculating his taxes for those years, even though he does not file amended returns, is the correction for having improperly skipped several years, and allows him to file correct returns for the years that are still open.