Steps to Compute Losses - Federal Tax Law PDF

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Federal Income Tax Lecture Notes from Casebook/Spring Course Chapter 4...

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Tax Law! Lecture Notes! Spring 2019!

Taxable Income

Other Taxable Income

Net Capital Gain

Alternative Net Capital Gain

15%

20%

Depreciable Buildings: 20%

Collectibles: 28%

Steps to Compute Losses (which are capped) 1. Determine that the loss from the sale is deductible – must check § 165 for permission. a. For sale or exchanges, (c) limits losses for sale or exchanges to: i. Losses from TxP’s business. ii. “Losses incurred in transactions entered into for profit.” Ex/ investment stock ➢ Leaves out personal assets like a loss from the sale of a personal residence. § 1.165-________

2. Assuming loss is deductible, go to § 165(f) if that loss is a capital loss a. § 1211 limits capital loss, not ordinary loss. b. We can use deductible CL to offset other CG from other transactions, and can use any excess thereafter against OI, subject to maximum deductions against OI of $3,000/year. Any leftover gets carried forward as if incurred in the next year under § 1212(b), which permits you to carry forward until death. i. Ex/ $500,000 salary income but his plummet and he sells his google stock at a $400,000 loss. TxP has no CG, and so he can deduct only $3,0000 from salary (OI), and carry the rest forward. ii. Why limit to $3,000? § 1211 is an anti-bunching rule – without the limit, the government is concerned TxPs would bunch CG transactions into 1 year and CL transactions into another year to get the benefit of both (lower tax rate and offset CL against higher OI rate). Net Capital Gain From Sales = Net Long Term Capital Gain (NLTCG) – Net Short Term Capital Loss (NLTCL). • LT means the asset was held by the TxP for more than 1 year. Thus, the asset’s holding period becomes very important.

NLTCG =

LTCG

STCG

LTCL

STCL

NSTCL = = NCG

➢ Must check to ensure the CL is deductible ➢ There will be subcategories on the LT side to account for different rates but they do not matter in computing NCG ➢ If there is no NSTCL, subtract 0 from NLTCG & we need LTCG to get NCG from sales...