Schedule D

[TMH4438]

Over many years, my wife and I had thousands of dollars of capital losses.  In the last three years, we have been out of the market, so TurboTax Deluxe has not been creating a Schedule D (Cap Gains/Losses) for us.  If we get back into the market, how will TurboTax know how to make current the old capital loss figures?

[TomYoung]

If you've been using TurboTax all along and transferring prior tax return information into the current year's tax file, TurboTax should be automatically giving you your $3,000 loss each year against ordinary income and adjusting the carried forward loss for future use.  Has the $3,000 been included in the last 3 years of income tax returns?  If it has, then all's good. 

[TMH4438]

Dear Tom,  Thanks very much for your reply.  The trouble is that, since TurboTax did not bring up a Schedule D in the last three years, none of that three thousand per year allowed tax loss has been accounted for in the last three years.  Since we were out of the market during that period, the software kind-of assumed no Schedule D was needed.

[TomYoung]

You don't need to include a Schedule D in your income tax return if it's not needed, but that doesn't mean that no activity is occurring with that carried forward loss, activity that TurboTax should be tracking.  My specific question you you was "have you been receiving the $3,000 loss each year?"  Look at your income tax return and answer that question.  If the answer is "Yes" then TurboTax is working "as designed" if you've been faithfully transferring prior year tax information into current year taxes.

TurboTax also prepares a "Federal Carryover Worksheet", (typically not printed out with an income tax return "for filing"), that should also show that loss carryover amount.  You should be able to look at that worksheet too.  (I use "desktop" TurboTax where all Forms/Schedules/Worksheets are always available to me.  I assume the "online" versions - if you use that - also have that capability.)

[rjs]

@TMH4438 

TurboTax would have created Schedule D to show the capital loss carryover, even if you had no sales of securities. You have to carry over the loss every year, whether or not you have any market activity. The critical point was three years ago - the first year that you filed a tax return with no market activity. When you started your tax return for that year, did you transfer information from the previous year? You probably don't remember at this point. If you did transfer information, TurboTax would have picked up the capital loss from the previous year. If you did not transfer information, and did not enter the capital loss carryover manually, the loss was dropped, and there was no way for TurboTax to pick it up in subsequent years.

In any case, you can't just pop a three-year-old loss into your tax return this year. You have to recalculate your tax returns for each of the years where the loss is missing, starting with the earliest year, and carry the loss from year to year in order to correctly calculate the loss that carries over to the current year. It isn't necessarily reduced by $3,000 every year. You will have to file amended returns for all the years where the capital loss carryover was missing, in order to establish the correct loss carryover amount. You don't have to wait for the past-year amended returns to be processed before you file your current-year tax return, but you need the information from the recalculated past-year returns in order to correctly calculate the capital loss carryover to the current year.

If you have further questions, it would be easier to discuss if you tell us the specific years involved. What was the last year that you had a Schedule D with a loss? What were the years that you filed without Schedule D (and without any capital loss shown on your Form 1040)? What is the first year that you will be filing with investment sales again? Did you already file your 2019 tax return?

[TMH4438]

OK.  I went back to the electronic copies of all the worksheets, and here is what I found:

For 2016 return, Cap Loss Carryforward Worksheet, long term carryforward to 2017 was $47,043.

For 2017 return, Cap Loss Carryforward Worksheet, long-term carryforward to 2018 was $48,938.

For 2018 return, Cap Loss Carryforward Worksheet, long-term carryforward to 2019 was $45, 938.  Note this was exactly the $3000 one may kind-of expect.

But...For 2019 return, there was nothing called a Cap Loss Carryforward Worksheet.  Instead there was a "Federal Carryover Worksheet", in which Line 13a lists long-term cap loss as 0 (actually, left blank).  I get the impression that when TurboTax re-organized their worksheets, my cap loss tracking fell through a crack.

[rjs]

So you're in much better shape than we thought. It looks like, at worst, only your 2019 tax return is wrong. It's not clear what happened. It looks like you did not transfer information from 2018 when you started your 2019 tax return. If you have already filed 2019 you will have to file an amended return to add the carryover. But the earlier years are okay. When you start your 2020 tax return, try to make sure that you transfer information from the amended 2019 return, so the correct carryover amount will transfer to 2020.

There's another possibility, though. Did you have any investment sales or other capital gains in 2019? If you had a large gain (such as if you sold a house), the gain could have used up all of the remaining loss carryover. Then you wouldn't see a loss on Form 1040, just a smaller gain. But the capital loss carryover from 2018 would appear on Schedule D line 6 or line 14. If this is the case, your 2019 tax return is correct, and you do not have to amend it, but you have no remaining loss to carry forward to 2020.

The Capital Loss Carryforward Worksheet calculates the amount of the carryover to the following year. The Federal Carryover Worksheet is the vehicle that actually carries it from one year to the next. Both worksheets should be in the file for every year that you have a capital loss carryover, until the loss is used up. TurboTax did not reorganize the worksheets. The Capital Loss Carryforward Worksheet is missing from your 2019 return for one of two possible reasons. One possibility is that, for some reason that we have not determined, the loss did not carry over from 2018 to 2019. The other possibility is that the remaining loss was used up in 2019. Either way, there was no loss in 2019 to carry forward to 2020.

If the capital loss carryover does not transfer from year to year, for any reason, you can enter it manually. In the Search box type "capital loss carryover" (without the quotes), then click the link that says "Jump to capital loss carryover."

[TMH4438]

Thank you so much for your help.  I think I understand much better now what is going on and what to do about it.  You should hang out your shingle as a tax consultant!