Capital loss, casualty loss, net operating loss — a loss by any name causes a financial setback. It’s something no one likes to think about, much less experience. But if you do suffer a loss, tax laws may provide a measure of relief in the form of a refund or lower taxable income. Here are examples of common losses you may experience, along with possible tax savings:
- Capital loss. Selling assets such as stocks, bonds, limited partnership interests and collectibles for less than you paid for them can result in a capital loss. However, the loss can be applied to offset capital gains and then used to reduce ordinary income, up to an annual limit of $3,000 ($1,500 if you’re married and file separately). Any remaining balance can generally be carried forward to future years. Keep in mind that capital losses caused by the sale of investments within your retirement accounts are not deductible. Losses on the sale of personal assets, including your home, are also not deductible.
- Casualty loss. A tax deduction may be available to you when a sudden, unexpected calamity like a wildfire or hurricane causes physical damage to your vehicle, home, furnishings or other property as long as it’s in a federally declared disaster area. For insured items, you’ll have to file a claim in order to deduct the loss, even if you know you won’t receive money from your insurance company. The loss has to exceed $100. In addition, deductibility limits involving insurance proceeds, basis and adjusted gross income (AGI) apply. Remember, you may not receive a deduction for a loss that is reimbursed by your insurance. You may be able to amend your prior-year return to reflect the current-year loss and claim an early refund. This may result in lower tax for that year that could produce a refund, but it may also change the amount of your deduction.
- Net operating loss. When expenses from your trade or business exceed your income, a net operating loss (NOL) deduction may result. If so, you can carry the NOL forward to reduce the tax burden from expected future income. The NOL deduction is limited to 80 percent of your AGI in future years. Any amount above the threshold is carried forward indefinitely until the entire loss amount can be fully applied. Track NOL amounts that carry forward from year to year to ensure you are getting the maximum deduction.
- Gambling loss. Did you know that you may be able to deduct the cost of those weekly lottery tickets on your tax return? That’s assuming you have gains from any type of gambling activity — but only if you itemize, and only to the extent of your gains. For example, if you have $5,000 in winnings and $7,000 in losses, you will be able to deduct $5,000. The $2,000 in excess losses is neither deductible nor eligible for carryover to future years.
Differing eligibility and limiting criteria, as well as documentation requirements and restrictions on transactions between family members and other related parties, affect the deductibility of tax losses. Call for help sorting out the rules and getting tax savings from losses you experience.