Investing can boost your net worth when you pick winners, but a few duds here and there can have you wishing you just left the money in a savings account. You'll get a little bit back when you file your taxes, but since Uncle Sam caps the amount you can deduct each year, you might have to carry forward the excess in future years.
No Higher Limit
When you're married filing jointly, you're actually at a disadvantage when it comes to deducting capital losses. The limit for your maximum capital loss carryover is $3,000 whether you're married filing jointly or single. But, if you and your spouse file separate returns, you're only allowed to deduct $1,500 each. On the bright side, there's still no expiration on the carryover of your excess losses. For example, if you have $30,000 in capital losses, you can use the first $3,000 and carry over another $3,000 every year until you're able to use them.
Calculating Loss Carryover
If you're filing jointly, you must include both your losses and your spouse's losses when figuring your capital loss. For example, if you have a $5,000 loss but your spouse has $10,000 of gains, your loss is used up when you file a joint return. But, if your spouse has $20,000 in losses and you have $5,000 in gains, you have a $15,000 net loss. Since you can deduct $3,000 of the excess losses on your tax return, you can carry over the remaining $12,000 to your next joint return the following year.
Future Filing Separately
If you file separately in the future, you're usually limited to carrying forward only your capital losses and your spouse gets to keep the losses she incurred. For example, say you had a $5,000 net loss and your spouse didn't have any investing gains or losses. In the first year when you filed jointly, you took a $3,000 loss together. But, if the next year you file separately, you get to use the $1,500 of the $2,000 on your return and carry forward the remaining $500. Since none of the losses were from your spouse, she doesn't get to deduct any of the carry forward the next year.
Community Property States
If you live in one of the community property states, your losses are automatically split between you and your spouse no matter who actually bought and sold the stocks. For example, if your spouse sells some stocks for a $2,000 loss, you're each credited with a $1,000 loss. So, if the following year you decide to file separately, you each get to offset $1,000 of gains -- or, if you don't have gains, deduct $1,000 -- on your own returns.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."