Capital Gains Loss Carryover Wasted

[jrob]

Any ideas about how to make use of a capital loss carryover which would otherwise be wasted?

The situation is:
 - I have about $300,000 in capital loss carryover
 - I have recently retired
 - My income (just dividends and capital gains) will be low enough for the next few years that I won't owe taxes
 - I will be required to use this capital loss carryover to offset my capital gains every year, even though I wouldn't owe taxes anyway

Thanks!

[Joet]

start moving some of your equity/risk portfolio to taxable, to move more of your potential future gains to taxable accounts

seems to me like thats a potential way to get funds out of a 401k/403b and into equities again for instance, and then 12 months later sold for normal expenses while enjoying your abundant carryover balance to make it tax free

[jrob]

Thanks for the response, but I don't think I understand.

I'm too young to take money from retirement accounts without penalty.  But even if I could, I don't see why I would want to.  Can you help me see what you are thinking?

[dragoncar]

It sounds like you have funds in taxable.  Can't you step up your basis?  That would at least help protect you if rates rise in the future.

However, the capital loss carryover deduction is a mere $3k/year.  So it'll take you 100 years to "waste" your 300k loss. 

I know it's personal but wow, can't help but wonder how you achieved the 300k loss.

Edit: BTW, I've been wondering the same thing only I have a smaller loss.  Not an issue for me now, as I pay taxes at a pretty high rate.  But in a few years when I hopefully retire, I'm not sure what to do.  I was hoping it was possible to defer the deduction, but I guess we'll find out in this thread!

[jrob]

Thanks dragoncar.  Yes, maybe just stepping up basis is the best thing to do.  It still seems to give me no real benefit, since I still mostly likely won't owe taxes either way.  It's not clear to me yet whether it would protect me better from rising rates then keeping the capital loss carryover. 

The deduction isn't just $3k/year.  The real issue is that if I have $40,000 in capital gains each year, then:  (1) I am forced to use my $300,000 capital loss carryover to offset that back to $0 in capital gains for tax purposes, even though (2) the $40,000 in capital gains is low enough that I wouldn't owe tax anyway.

[Much of the loss was due to S-corporation issues passed through to me personally on my K1.  The rest was due to tax loss harvesting in 2008.]

[foobar]

You can take money out of your retirement accounts penalty free using a SEPP but that may not make sense for you. Probably the best move is to roll some money over into a ROTH every year until you have enough OI to be out of the 15% tax bracket before capital gains.  This will cause you to pay more taxes now though. In exchange you will not pay them in the future and you don't have to worry about MRD.

I think doing the stepped up cost basis is a poor idea. If you are going to be making<80k(assuming married) you are never going to be paying capital gains anyway so the net gain is zero (other than some flexibility to see 200k of stock in one year). If you do nothing and have 25k of capital gains/year, you will get to write off 3k year against your OI.  It isn't a big win but it is better than the zero win you get by doing the stepped up cost basis. 300k a year sounds like a lot but if you look at it as 25k of capital gains and 3k of OI a year, it will be gone in 11 years.

Thanks dragoncar.  Yes, maybe just stepping up basis is the best thing to do.  It still seems to give me no real benefit, since I still mostly likely won't owe taxes either way.  It's not clear to me yet whether it would protect me better from rising rates then keeping the capital loss carryover. 

The deduction isn't just $3k/year.  The real issue is that if I have $40,000 in capital gains each year, then:  (1) I am forced to use my $300,000 capital loss carryover to offset that back to $0 in capital gains for tax purposes, even though (2) the $40,000 in capital gains is low enough that I wouldn't owe tax anyway.

[Much of the loss was due to S-corporation issues passed through to me personally on my K1.  The rest was due to tax loss harvesting in 2008.]

[Freeyourchains]

Also keep in mind,

that $300k may balance out with any Short Term Capital Gains in the future.

I had a loss when i was younger, and kept carrying it over over minus $3k per year as i saved more and more and invested more and more, and that Capital Loss was canceled out quickly as I made a lot of money from short term investments especially if you are into Short term Capital Gains.

Or it is now a new investment option to you, as the government has full taxes on it discouraging it's public use to average investors (unless you have capital loss carry over, or day trade.)

Like buying HAUP at $0.70, and selling at $1.13 within two weeks, making 61% profit of your investment in two weeks. (Research, then buy low, sell high, with emotionless trading for short term Capital gains, same goes for long term).

Ordinary taxes on short term Capital Gains= 0%. Because of the Capital loss carry over from year to year cancels out all short term Capital Gains also.

Disclaimer: You may lose money just as quickly, but don't fear to practice the skills necessary to prevent losses..and you'll make money. Greater the Risk, Greater the Reward or Loss. But at least your big rewards aren't taxed greatly for it with Capital Loss Carryover.

[the fixer]

I second the suggestion to do roth rollovers. Anything else I could think of is just advice to "make more money," which would benefit you whether or not you were getting taxed.

[jrob]

Thanks everyone for the thoughts.