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  1. #1
    Breadbaker is offline Junior Member
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    Can I use less than 3K of a net capital loss?

    Massachusetts

    I have a question re the capital loss limitation on Form 1041, Schedule D (I think it's the same as Form 1040, Schedule D). For 2009, a trust has $1K of income and $7K of net capital loss. Line 16 says: "Capital Loss Limitation: Enter here and as a (loss) on Form 1041, line 4, the smaller of the loss on line 15 or $3000".

    If I do that, the trust ends up with negative total income, so owes no tax, and also gets a capital loss carryover of $7K - $3K = $4K. This is the final year of the trust, so the capital loss carryover can be passed on to the beneficiary. Note that because the currently applied loss ($3K) exceeds the other income, in a sense I've "wasted" $2K of it that could otherwise be carried over.

    Instead, can I enter only $1K of capital loss on line 16 to be applied against the other trust income, and use the remaining $6K in the Capital Loss Carryover Worksheet, which will end up being passed to the beneficiary?
  2. #2
    Kiawah is offline Senior Member
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    I by no means have any formal/proper legal or accounting knowledge in this area.

    However, in the past on at least 3 occassions over the course of a number of years on personal returns (for me and other family members), I have limited the loss and used up only enough of the capital gains that I needed to zero balance out the current year income. Had to overwrite and force turbotax to do that (thinking they weren't handling that correctly). My thinking, if you are allowed to carryforward loss to next year, why would you ever use up more than you needed.....just carry everything I don't need this year into next Never been audited.

    This year, paid KPMG to do a trust return, and they used up all 3K of the capital gain loss even though it wasn't needed.

    I suspect after seeing how KPMG handled it, that using the whole 3K is probably the correct accounting way to handle it.
    Last edited by Kiawah; 03-08-2010 at 03:14 PM.
  3. #3
    tranquility is offline Senior Member
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    If it's the final year return, won't it all go to line 11 on the K-1?
  4. #4
    LdiJ is offline Senior Member
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    Quote Originally Posted by tranquility View Post
    If it's the final year return, won't it all go to line 11 on the K-1?
    It should.
  5. #5
    Breadbaker is offline Junior Member
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    The Capital Loss Carryover Worksheet takes into account the amount of net capital loss that was used as a deduction, and only the remainder of the net capital loss goes into the carryover. It's the carryover amount, not the full net capital loss, that is passed to the beneficiary on K-1, line 11. So taking the full $3K capital loss deduction, as the instructions seem to say, "wastes" $2K that could otherwise go into the carryover.

    The $3K limit is the maximum capital loss deduction I'm allowed to use, but can I elect to use less than that? Seems reasonable to me, but the instructions say "take the $3K deduction".

    Publication 17, Your Federal Income Tax, says (in part): "When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year." That indicates that I have some choice in whether to claim the current year's capital loss deduction; if I can do that, why not choose how much of it to use?
  6. #6
    FlyingRon is offline Senior Member
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    Sounds like it from that warning you have to burn the $3K this year whether you take it as a deduction or not.
  7. #7
    tranquility is offline Senior Member
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    Believe me, OP, I understood the question and gave you the answer.

    Say I sold something for $1,000 which cost me $10,000 with no other activity. I fill out the 1041 with the $3,000 loss in the appropriate space and get a <$3,000> taxable income.

    Guess what will flow through to line 11 of this final year K-1?

    $9,000, with either a "C" or a "B" designation. (Depending on the type of capital loss carryover.)
    Last edited by tranquility; 03-08-2010 at 02:03 PM.
  8. #8
    Breadbaker is offline Junior Member
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    Thanks for your patience with a novice and for your simplified example, tranquility. That pointed to a problem I have with Form 1041's taxable income (Line 22).

    In your example, and in my specific case as well, the computation of Line 22 is (3100). Line 22 says "If a loss, see p. 23...", which says:
    "Minimum taxable income. Line 22 cannot be less than the larger of: The inversion gain of the estate or trust, as figured under section 7874, if the estate or trust is an expatriated entity or a partner in an expatriated entity, or
    The sum of the excess inclusions of the estate or trust from Schedule Q (Form 1066), line 2c."

    Neither of these two cases applies to my trust, so I don't understand what to do here. Since there is no inversion gain or excess inclusions, must I set Line 22 to 0, or do I leave Line 22 at (3100)? I'd assumed the former, and that led to my "losing" the $3K net capital loss. But if the latter is valid, then the loss carryover works out just as you've stated, and (as you have told me) my original question is needless.

    Can you clear up my Line 22 confusion? Thanks.
  9. #9
    tranquility is offline Senior Member
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    Sorry, explaining how it all flows though is difficult. But, you stopped reading one paragraph too soon.

    "If"
  10. #10
    Breadbaker is offline Junior Member
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    Aha. Said next paragraph starts out: "NOL. If line 22 (figured without regard to the minimum taxable income rule stated above) is a loss, the estate or trust may have an NOL."

    OK, I looked at NOLs last year and decided that because nonbusiness capital losses are excluded, the trust does not have an NOL (Pub. 536). However, since this sentence mentions in passing that Line 22 may validly be a loss, I realize that my former interpretation was naive, and I should go ahead and show the loss on line 22. Then the Schedule D Capital Loss Carryover Worksheet flows the (3K) in question back into the carryover, whence I can pass all of the net capital loss to the beneficiary on the final K-1.

    Many thanks, tranquility, for helping me read the instructions sufficiently carefully. It'd be nice if they were just a tad more clear, but I'll note that compared to the Massachusetts estate/trust forms instructions, the U.S. instructions are as clear as a bell!
  11. #11
    tranquility is offline Senior Member
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    Let's just say I couldn't imagine doing a return by hand any more.
  12. #12
    LdiJ is offline Senior Member
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    Quote Originally Posted by tranquility View Post
    Let's just say I couldn't imagine doing a return by hand any more.
    Me either...particularly anything other than a basic individual return. Particularly if you do not already know what kind of outcome you expect to receive on the return.

    Our firm has a service that we offer for a low fee. If someone does their own return then we will review it for errors and electronically file it for them with the IRS. Usually, most of the returns are correct and only a handful of them require changes.

    This year, EVERY SINGLE ONE of the returns submitted to us under the program has had errors. On the majority of them they have simply not given themselves the Making Work Pay Credit, but there have been lots of other errors as well.
    Last edited by LdiJ; 03-10-2010 at 08:05 PM.
  13. #13
    tranquility is offline Senior Member
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    Actually, the kickbacks I get are claiming they didn't get it but did.

    (Well that, and the government retiree issue. Most have no idea what they got.)

    By the way on the tax lawyer's mailing list, an EA sent out a number on where to check. (And, a theory of a website which should be up March 22! The 22! Government, what a country.) Did you get it?

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