Remaining Captal Losses

[Christian]

A client passed on in 2024 having some $25,000 plus in remaining capital losses. Are these deducted on Schedule A or on the Form 1040?

[Christian]

I should have said are all of the losses deducted on the Form 1040 which would require possibly overriding the line item as using Schedule A the client may not have gotten the full amount taken off. It is a moot point as her itemized deductions far exceed the standard deduction but the ATX software shows only the $3000 yearly amount on the Form 1040 so I will simply deduct that from the total loss and show the remaining amount on her Schedule A. I think this is correct but I have not done one of these in many moons.

[jklcpa]

No, the losses in year of death are handled like any other year. Any capital losses that are unused (those that would carryfwd if the person lived) are lost. They die with the decedent.

[Christian]

So the now deceased client can only deduct the $3,000 normally allowed per year. They must have changed this in 2017  perhaps.

[Christian]

I should have clarified. This is her final personal return and not an estate return.

[Christian]

Herein lies my confusion.

However, when you die, any capital loss carryover is lost. It cannot be utilized by your estate or surviving spouse except in the final tax return filed for the year that you die. Therefore, it’s important to use as much of the remaining deduction as possible in the final year (or in the years prior to death). There are planning techniques available to help accomplish this goal. 

[jklcpa]

35 minutes ago, Christian said:

Herein lies my confusion.

However, when you die, any capital loss carryover is lost. It cannot be utilized by your estate or surviving spouse except in the final tax return filed for the year that you die. Therefore, it’s important to use as much of the remaining deduction as possible in the final year (or in the years prior to death). There are planning techniques available to help accomplish this goal. 

That's correct. What this means is that the final 1040 can show up to a $3,000 loss (just like usual) and any remaining loss carryover is lost.

The planning opportunity mentioned is where a surviving spouse can sell capital assets having a gain in that year of death so that the otherwise unused losses would offset those gains. Example: your client is allowed $3K of losses allowed in the current year and $25K losses unused that are going to be lost. The taxpayer (prior to death) or surviving spouse any time during that year, if filing MFJ, could have sold other capital assets having GAINS up to that $25K with no additional tax effect.  If single, that client could have done that in prior years or in the final year prior to death to use up the losses so that they aren't lost.  For a single taxpayer where someone has a POA and is aware of the situation, that person could so initiate such a sale of capital asset prior to the taxpayer's death.

[Sara EA]

If the investment account was joint and originally funded jointly, half of the carryover losses belong to the surviving spouse and can be used on his or her future returns.  The deceased spouse's half is lost forever after the final return.  Many of us still have clients who lost a fortune in the 2008 market crash, pulled out of the market altogether, and will have to live to be 200 to use up the losses at $3k per year.  That $3k limit has been around since 1978 and never adjusted for inflation.