Oct 01, 2021
By Joel Kratzer, CPA Senior Manager at Terry Lockridge & Dunn
Capital loss, casualty loss or net operating loss — a loss by any name causes a financial setback. It is 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. 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 are 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.
There are special rules for deducting losses if you invest in publicly traded partnerships (PTPs), so ask for help if you find yourself with potential losses from these partnerships.
- 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, if it is in a federally declared disaster area. For insured items, you will have to file a claim in order to deduct the loss, even if you know you will not receive money from your insurance company. The loss must exceed $100. In a Presidentially declared disaster area, this loss must exceed $500. In addition, deductibility limits involving insurance proceeds, basis, and adjusted gross income 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 which could produce a refund, but it may also change the tax you pay in the current year.
- Net operating loss. When a business's tax deductions exceed taxable income, the result is a net operating loss (NOL). Tax changes now allow a company to carry back an NOL incurred from 2018 through 2020 for up to five years to offset taxable income. Beware, however, that the ability to carry back an NOL does not apply to the 2021 and future tax years.
- Gambling loss. Did you know that you may be able to deduct the amount of gambling losses on your tax return? This is 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, documentation requirements and restrictions on transactions between family members and other related parties can affect the deductibility of tax losses. Feel free to reach out for help when sorting out the rules and getting tax savings from losses you incur. Joel can be reached at firstname.lastname@example.org to discuss your circumstances. Or contact any of the accountants at Terry Lockridge & Dunn at 319-364-2945 in Cedar Rapids, or at 319-339-4884 in Iowa City.