Capital Loss Treatment 2008-2010

[magic_man]

What is the name of your state? California

Those of us in the 10% and 15% tax brackets will pay 0% tax on qualified dividends and capital gains in years 2008-2010. I see opportunities....

This brings up a question: If I sell stocks at a LOSS during those years, will I still be able to offset up to $3,000 of the loss against income (carrying over any excess to future years), assuming there are no capital gains to offset? I know that's the current law, but will this rule still apply in 2008-2010, when there is 0% tax on capital gains for my income bracket?

I plan to convert traditional IRAs to Roth IRAs during those years (making sure I stay below the 15% tax bracket each year). I will have to sell stocks in order to pay the tax on the IRA conversions. I'm trying to work out a strategy to pay the least amount of tax possible. Any ideas are welcome!

If possible, please include additional reference links in your reply so I can research further. Thanks very much for your assistance.What is the name of your state?

[tranquility]

Those of us in the 10% and 15% tax brackets will pay 0% tax on qualified dividends and capital gains in years 2008-2010. I see opportunities....

Nope, sorry. I won't go into all the obvious and subtle errors here, but the reality is that only a portion of the amount would fall under the law. (Only the rate changes. The calculation would be the same as the 5% tax rate today.)

[magic_man]

Tranquility,

Thanks very much for responding to my post, but your answer isn't very helpful because you didn't explain my "obvious and subtle errors," so I can't learn from it. I have filled out a Schedule D and the Qualified Dividends and Capital Gain Tax Worksheet in the 1040 instruction booklet (p. 38), using capital gain/dividend tax rates for 2008, to get a better idea of how it may work. I don't see the problem(s) you refer to.

I am talking about a net long-term capital loss here, in years 2008 through 2010, when the tax on long-term capital gains and qualified dividends for 10%/15% tax brackets will be 0%.

Some sample numbers: Taxable income of $30,000. (This is after the long-term capital loss of $3,000 is shown on Line 13 and the taxable amount of the IRA conversion is entered on Line 15b.) No short-term gain/loss. There would also be qualified dividends of approx. $2,500. According to my calculations, tax on the qualified dividends would be $0, using the 2006 Qualified Dividends and Capital Gain Tax Worksheet with 2008 tax percentages plugged in. Total tax (using 2006 tax table) is $3,366.

What do you mean by "only a portion of the amount would fall under the law"? What is it that I'm overlooking? If the calculations will be the same as the 5% tax rate today (with only the rate changing), then are you saying that you believe capital losses will still be allowed, as they are today? Please, enlighten me (and others who read this forum). I'd appreciate any assistance here.

[LdiJ]

Personally, I have not studied that issue enough to give you any kind of response, and I probably won't until after the 2007 season, simply because there is an awfully lot of time for Congress to change its mind...or to start "tweaking".

So, while I think its good to be doing some long term planning, its not a done deal until its a done deal.

[tranquility]

Of course the actual numbers are important, that's why I referenced the current calculation for the 5% capital gains tax rate. In order to point out the problems I have to show the assumptions I am making from your comments and we would need to go back and forth until we have understanding so I could direct you. It is not my job to teach the law and write articles on a topic. I note some things:

1. If you have a capital loss, that will still carry over to the future. There is no change here. I am unsure of your goal/point when this topic is included in the potential 0% tax rate on capital gains beyond to say you can still take up to $3,000 of the excess loss against income.

2. The conversion from traditional to Roth will certainly be taxable. Even though the amounts are not considered in your AGI (because you would be using a modified AGI) in determining if your income will limit your ability to do this at all, it is still considered when the capital gain advantaged rate is calculated. How much stock you need to sell to pay for taxes (although since taxes are paid in the following year you may be able to divide up income a bit) will also be included in your income. The tax-advantaged capital gain rate is based on the amounts below the 15% bracket. So, bottom line is that if you are a married person who has no income other than capital gains in the year in question, the (round numbers assuming $60,000 is married filing jointly bracket of 15%) most you can save is $3,000 in taxes. (Difference between 5% and 0% of $60,000.) Filing seperately, singly or making any income will change that. (In your case, your salary, other income and the amount converted--the capital gain will not be counted for this portion of the calculation.)

3.The bottom line is the law stays the same. I don't see any special advantage of generating capital loss in the years in question (assuming the law does not change before there), only in the generation of capital gain. Even then, the maximum benefit is going to be around $3,000 and that would be in the case of the unusual circumstance of:
1. Married filing jointly
2. No income at all besides capital gains
3. The amount of capital gain to the 15% level of ordinary taxation. (In other words you have a gain on sale in the amount of [currently] $61,300. )
Any change in any of those assumptions will reduce the tax advantage.

[magic_man]

LdiJ, your point is well taken that the laws could change. I probably wouldn't make any moves until the end of each tax year anyway.

At this point, I'm just making general plans and mulling over different ideas. It seems like it'd be advantageous to convert the IRAs within the next three years because starting in 2011, tax rates are scheduled to go up again. Of course, I realize that could change too!

Thanks so much, Tranquility, for clarifying your answer. That helped a lot. I understand your points, and I appreciate very much that you took the time to respond again.

My reasoning behind the idea of taking a capital loss (rather than a 0% gain) during those three years is:

(1) I could get rid of a few dog stocks, which I haven't been able to sell for the past few years because it would make my daughter ineligible for full college financial aid (that's another story!).

(2) If I take a $3,000 loss, then I can convert $3,000 MORE of my traditional IRA in any one year and still stay below the 15% tax bracket threshold.

I realize that I didn't explain the reasons before. Does that logic make sense to anyone but me?