Allocation of Use of Capital Loss Carryovers Between Spouses

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kardan
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Allocation of Use of Capital Loss Carryovers Between Spouses

Post by kardan »

How does one allocate the use of capital loss carryovers between spouses for Federal income tax purposes? For example, assuming the following:

1. Spouse A has $60K of loss carryovers attributed to assets Spouse A individually owned
2. Spouse B has $40K of loss carryovers attributed to assets Spouse B individually owned
3. Couple files MFJ and has no capital gains or losses for the year
4. Couple utilizes $3,000 of capital losses to offset other income.

Can the $3,000 of loss be attributed to either spouse as they see fit? Does the use of the loss have to be prorated based on the amount of the total loss carryover of each spouse? Some other method?

The reason for the question is that upon the death of one of the spouse's, that spouse's capital loss carryovers are effectively lost, so depending on circumstances it may be advantageous to allocate the losses to one particular spouse. If anyone is aware of IRS documentation of how to do this, I'd appreciate pointing me in the right direction.

Thanks.
tj
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Re: Allocation of Use of Capital Loss Carryovers Between Spouses

Post by tj »

Where are you reading that spouses who file taxes jointly would have separate tracking of carryover losses? Why wouldn't all the carryover losses remain with the surviving spouse?
TechRunnerZenDad
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Re: Allocation of Use of Capital Loss Carryovers Between Spouses

Post by TechRunnerZenDad »

I'm not a tax professional, but I can try to help you understand the general concept of allocating capital loss carryovers between spouses when filing jointly.

When a married couple files taxes jointly (MFJ), they are treated as a single tax entity. This means that both spouse's capital gains and losses are combined, and the $3,000 limit on capital losses that can be used to offset other income applies to the joint return, not to each spouse individually.

In the example you provided, Spouse A has $60K of loss carryovers, and Spouse B has $40K of loss carryovers. When filing jointly, you would combine these amounts for a total of $100K in loss carryovers. The couple can utilize $3,000 of the combined capital losses to offset other income. The allocation of the losses between the spouses isn't something that can be chosen freely. Since the losses are being combined, the IRS will treat them as one amount when filing jointly.

Regarding the death of one spouse, it's true that the capital loss carryover of the deceased spouse cannot be transferred to the surviving spouse. However, since the couple is filing jointly, it's important to consider that the capital loss carryovers are already combined and cannot be allocated separately.

To get the most accurate and tailored advice for your specific situation, it's best to consult with a tax professional or contact the IRS directly for clarification. They can help you understand the rules and provide guidance on how to handle capital loss carryovers in your particular situation.
Faith20879
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Re: Allocation of Use of Capital Loss Carryovers Between Spouses

Post by Faith20879 »

I remember there was a recent discussion:
viewtopic.php?t=394307
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LadyGeek
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Re: Allocation of Use of Capital Loss Carryovers Between Spouses

Post by LadyGeek »

TechRunnerZenDad wrote: Sat Mar 25, 2023 5:42 pm I'm not a tax professional, but I can try to help you understand the general concept of allocating capital loss carryovers between spouses when filing jointly.

When a married couple files taxes jointly (MFJ), they are treated as a single tax entity. This means that both spouse's capital gains and losses are combined, and the $3,000 limit on capital losses that can be used to offset other income applies to the joint return, not to each spouse individually.

In the example you provided, Spouse A has $60K of loss carryovers, and Spouse B has $40K of loss carryovers. When filing jointly, you would combine these amounts for a total of $100K in loss carryovers. The couple can utilize $3,000 of the combined capital losses to offset other income. The allocation of the losses between the spouses isn't something that can be chosen freely. Since the losses are being combined, the IRS will treat them as one amount when filing jointly.

Regarding the death of one spouse, it's true that the capital loss carryover of the deceased spouse cannot be transferred to the surviving spouse. However, since the couple is filing jointly, it's important to consider that the capital loss carryovers are already combined and cannot be allocated separately.

To get the most accurate and tailored advice for your specific situation, it's best to consult with a tax professional or contact the IRS directly for clarification. They can help you understand the rules and provide guidance on how to handle capital loss carryovers in your particular situation.
Was this post created by AI (ChatGPT)? Please state your sources, as the statement on what happens when a spouse dies is incomplete and can be misleading.

From: Publication 550 (2022), Investment Income and Expenses | Internal Revenue Service
Decedent's capital loss. A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final income tax return filed for the decedent. The capital loss limits discussed earlier still apply in this situation. The decedent's estate cannot deduct any of the loss or carry it over to following years.

Joint and separate returns. If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. However, if you and your spouse once filed a joint return and are now filing separate returns, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss.
Faith20879 wrote: Sat Mar 25, 2023 5:44 pm I remember there was a recent discussion:
viewtopic.php?t=394307
The link in human readable format: Carry Over Losses when a Spouse Dies
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Topic Author
kardan
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Re: Allocation of Use of Capital Loss Carryovers Between Spouses

Post by kardan »

LadyGeek wrote: Sat Mar 25, 2023 7:28 pm

From: Publication 550 (2022), Investment Income and Expenses | Internal Revenue Service
Decedent's capital loss. A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final income tax return filed for the decedent. The capital loss limits discussed earlier still apply in this situation. The decedent's estate cannot deduct any of the loss or carry it over to following years.

The "Decendent's capital loss" from Publication 550, of which I am aware, is really the basis for my question. Since a capital loss carryover that belongs to one spouse cannot be carried over after their death, it implies that the consumption of capital losses against ordinary income in years while both spouses are alive must be allocated between spouses to the extent that each spouse has their own carryovers (resulting from losses on individually owned assets). However, I have not been able to find any guidance as to how the use of capital losses should be allocated between the spouses during their joint lifetimes.
Katietsu
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Re: Allocation of Use of Capital Loss Carryovers Between Spouses

Post by Katietsu »

tj wrote: Sat Mar 25, 2023 5:38 pm Where are you reading that spouses who file taxes jointly would have separate tracking of carryover losses? Why wouldn't all the carryover losses remain with the surviving spouse?
No. The surviving spouse does not get to keep remaining carryover losses generated by the deceased spouse. See the linked discussion.

As for the $3000, my recollection is that $1500 would be deducted from the running total of each spouse, as long as both spouses have it available. It is not discretionary.
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kardan
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Re: Allocation of Use of Capital Loss Carryovers Between Spouses

Post by kardan »

Katietsu wrote: Sat Mar 25, 2023 8:18 pm
tj wrote: Sat Mar 25, 2023 5:38 pm Where are you reading that spouses who file taxes jointly would have separate tracking of carryover losses? Why wouldn't all the carryover losses remain with the surviving spouse?
No. The surviving spouse does not get to keep remaining carryover losses generated by the deceased spouse. See the linked discussion.

As for the $3000, my recollection is that $1500 would be deducted from the running total of each spouse, as long as both spouses have it available. It is not discretionary.
I just saw your response in the post referenced up-thread and sent you a PM. Do you recall the source of the requirement to consume the carryover by allocating $1500 to each spouse. I was guessing that the allocation between spouses would either be up to the taxpayer to determine or would be in proportion to their respective loss carryovers, although I can see some logic to the $1500 each split. I'm just wondering whether this treatment is documented somewhere.

Thanks.
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Duckie
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Re: Allocation of Use of Capital Loss Carryovers Between Spouses

Post by Duckie »

kardan wrote: Sat Mar 25, 2023 2:22 pm Can the $3,000 of loss be attributed to either spouse as they see fit? Does the use of the loss have to be prorated based on the amount of the total loss carryover of each spouse? Some other method?
Here's what I found using Google:
  • Planning with Capital Loss Carryovers
  • How are capital loss carryovers allocated between spouses?
    Capital loss carryovers are deductible by the taxpayer who sustained the loss. If the property is held jointly, then the loss is allocated between taxpayer and spouse proportionally to their interest in the underlying property.
    __
  • It is not always evident to which taxpayer a loss carryover is attributable to. It is important to consider the owner of the property whose sale or disposal generated the loss to make that determination.
    Source.
To me this means that Spouse A gets 60% of the $3000 capital loss and Spouse B gets 40%. This split is just for record-keeping. It only matters when the first spouse dies. The 60/40 ratio depends on whether or not this is the only carryover. There may be other circumstances, other losses that change that number.
  • Till Death Do Us Part: Dealing With Carryovers When a Spouse Dies
  • For a couple who have filed a joint return for many years, there could be several types of carryovers coming into the year that one spouse dies. Each carryover must be allocated to each spouse. The following is a brief summary of how each carryover should be attributed to the decedent and the surviving spouse.
    __
  • Capital loss carryovers:
    Capital loss carryovers are also deductible only by the taxpayer who sustained the loss—again according to Rev. Rul. 74-175. Therefore, each year, any sales of capital assets should be tracked to determine which spouse generated the capital loss. If a couple sell securities, property, or other capital assets held jointly at a loss, and the loss is not fully used in years before one spouse dies, half of the loss is allocated to the surviving spouse and can be carried over. If just one of the spouses owned the asset that generated the capital loss carryover, any carryover is solely attributable to the spouse who owned the property and incurred the loss, and that carryover is lost if not absorbed in the joint return filed for the year of death.
    Source.
To me this means each spouse should track his own carryover losses separately. While still married and filing MFJ, it's joint income and joint losses, but separate records must be kept to be used when one spouse dies.
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