If I have a loss carry-forward from a previous year that is greater than $3,000, can I use that to offset any capital gains greater then $3,000? Or if my capital gains are greater then $3,000, is the maximum I can carry forward $3,000 that year?
-- Tom Trax
Considering the market's recent stumble, your question may affect more people then you realize.
To determine whether you have a capital loss carry-forward (or carryover), you must net your capital gains against your capital losses. Capital gains and losses are generated from the sale of capital assets, like securities, investment property, your home, jewelry or even a stamp collection.
The amount of capital losses you can claim in a single tax year is limited to the amount of your capital gains, plus an additional $3,000. So the maximum net capital loss you can claim on your tax return is $3,000. But what if your total net loss is, say, $7,000? The remaining $4,000 can be carried forward to use in future years.
If, for example, in 2001 you find yourself with a net capital gain of $2,000, you can use your entire $4,000 carry-forward loss to end up with a net capital loss of $2,000.
But what if you get so frustrated with the market you decide not to make a trade in 2001? Can you use your $4,000 carryover? Remember, you're allowed up to $3,000 in net capital losses. So you can use $3,000 of your $4,000 carry-forward amount in 2001. The remaining $1,000 can be carried forward to 2002.
Capital losses can be carried forward until they're used up or until you die.
The capital loss carryover worksheet on page 6 of the instructions to
-- Capital Gains and Losses
will help you calculate your carryover loss.
Big note: Carried-over losses keep their original character as long-term or short-term losses. So a long-term capital loss carried forward from a previous year will offset long-term gains of the current year before it offsets short-term gains of the current year. It's important to complete the worksheet in the Schedule D instructions to determine the character of your carryover loss. For more on loss carryovers, see this recent
Gifts to the Kids
I would like to give some stock to my child and am wondering what the implications are if the fair market value of the asset is under $10,000 at the time of the gift. What is the tax basis for my child? What is the capital gain I would report? Is this a good way to shift money to a child and avoid capital gains tax? It would seem to be too good to be true, but my first glance at IRS publications seems to indicate that the child would have my cost basis as her basis going forward. -- Bob Sweet
Thanks to the soon-to-be-dropping capital gains rates, now is a great time to give assets to your kids.
Typically, if you're in the 15% ordinary income tax bracket, your long-term capital gains are taxed at 10%. Starting Jan. 1, 2001, any gains from the sale of property held more than five years will be taxed at 8%.
For taxpayers in higher tax brackets, the reduction in the capital gains rate applies only to assets purchased after Jan. 1, 2001 and sold for a gain at least five years later. Gains on those sales will be taxed at 18%, rather than the current 20%. Check out this recent
Tax Forum for more details.
If your child is over age 14, she is most likely in the 15% tax bracket. (If she is under 14, she would pay taxes at your rate.) If you give her assets that have been held for at least five years, she only will owe 8% on any gains generated from a sale starting in 2001.
The other perk to giving your kid assets is that she assumes your holding period. So if you've held the assets for four years, and she waits another year to meet the five-year requirement, she can sell and get the lowest, 8% cap gains rate.
You can give up to $10,000 a year to any one person with no tax implications. If you are married, you and your spouse can give up to $20,000 to a single person in a single year. You don't have to be related to the person receiving the gift, so feel free to include your friends, neighbors or helpful tax columnists.
Gifts under $10,000 do not cut into your lifetime unified estate and gift tax credit of $675,000 (which will gradually increase to $1 million for individuals, $2 million for couples, by 2006). That means if you're single, the first $675,000 of assets are not subject to estate taxes at your death.
But any gift over $10,000 will cut in to your credit. So if you're single and you give $12,000 to your little brother, the $2,000 will come out of your lifetime exclusion. (If you're married, you could split the gift with your spouse, and it wouldn't have to count against your lifetime exclusion.)
Your child receives your cost basis with your gift. So when she sells the asset, her gain or loss will be based on the difference between the asset's fair market value on the day of the sale and the amount
originally paid for it.
If the assets, instead, were part of an inheritance from you, your child would receive a "step-up" in the original basis to the fair market value on the day of your death.
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TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.