Q.: I read your article on using losses to reduce taxes with great interest because my father died last year, and my accountant says I can’t use any of the loss carryforwards. That doesn’t seem right to me. Do loss carry-overs end when one dies?
–Paul in St Louis
The column you reference involved capital losses so I’ll assume those are the losses in question. Other types of losses like net operating losses or passive activity losses have nuances I won’t address.
It is not automatic for all situations, but a loss carry-over can end once an account owner dies. The primary determinant is account titling and filing status.
To recap what a capital loss carry-over is, let’s say you sold two holdings during 2021, and you had no carry-overs from prior years. One sale resulted in a $10,000 long term capital gain and the other a $25,000 capital loss. Your net loss for the year is $15,000. You use $3,000 of that to offset ordinary income on your 2021 return.
The remaining $12,000 carries forward into the 2022 tax year. It is first used to offset gains realized in 2022, then $3,000 of 2022 ordinary income. Any remaining loss carries into 2023.
For an account owner who files as a single, a loss carry forward can be used on the decedent’s final tax return. However, any losses remaining that would normally carry forward are forever lost. This could be your situation.
For a surviving spouse with whom the decedent files their tax return jointly, the rules differ. When a surviving spouse files a joint return for the year in which the decedent died, all of the carry-over can be used on that return, even if the surviving spouse incurs income or capital gains after the date of death.
In the year following the year of death, only one half of the carry-over from jointly owned assets is usable by the surviving spouse. The other half is lost. Any loss carry-over from the year of death return that was attributable to losses incurred solely by the deceased is lost as well, as may be the case if the asset was titled just in the deceased’s name.
When loss carry-overs exist, some planning can help preserve the use of the losses. Since all of the carryforward can be used on a joint return for the year of death, a surviving spouse should consider selling holdings that would trigger gains. The losses would offset taxes on those gains.
In the above scenario, if the surviving spouse is hesitant to sell assets for a gain because they still wish to hold those securities, they may immediately repurchase those securities. “Wash sale” rules do not apply to gains. The survivor’s basis would be that higher purchase price thus making potential gains on future sales lower.
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Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.