Eric Sheldon CPA, PC

The Importance of Recording Income Losses and Expense Offsets

Income losses and expense offsets are used to reduce the tax burden on an individual or company. These can be carried forward or backward, depending on the nature of the loss. Generally, income losses are allowed against current profits while capital losses are never allowable against any kind of income.

 

Why are income losses important?

  • Investment losses can help you reduce taxes by offsetting gains or income.
  • Even if you don’t currently have any gains, there are benefits to harvesting losses now, since they can be used to offset income or future gains.
  • If you have more capital losses than gains, you may be able to use up to $3,000 a year to offset ordinary income on federal income taxes, and carry over the rest to future years.

 

Types of Gains and Losses

There are two types of gains and losses short-term and long-term. Short-term capital gains and losses are realized from the sale of investments that you have owned for one year or less. Long-term capital gains and losses are realized after selling investments held longer than one year.

 

How are gains and losses taxed?

The key difference between short- and long-term gains is the rate at which they are taxed. Short-term capital gains are taxed at your marginal tax rate as ordinary income, which tops outs at 37%. For those subject to the net investment income tax (NIIT), which is 3.8%, the effective rate can be as high as 40.8%. With state and local income taxes added in, the rates can be even higher.

 

But long-term capital gains, the capital-gains tax rate applies and it’s significantly lower.

 

There is so much more to know about income losses and expense offsets. If you have questions, or want a second opinion, give us a call.

 

You Might Also Like

Did you like this article?

Get notified when I publish new articles. Just enter your email address below.

About the Author

Eric Sheldon

Eric Sheldon

Eric Sheldon is a certified public accountant with more than 25 years of experience in a wide variety of industries. He's the owner/operator of Eric Sheldon CPA, PC, an accounting firm that specializes in providing tax strategy and preparation, accounting, and bookkeeping services to individuals and small business owners.

More information:

Maximize Tax Savings by Year-End

As we close out the year and get ready for tax season, here’s what you can do to maximize your tax savings by year-end. Personal Exemptions Personal exemptions are eliminated for tax years 2018 through 2025. Standard Deductions The standard deduction for married couples filing a joint return in 2022 is $25,900. For singles and

Read More »

Tax Tips for Retirees and Retirement Accounts

For many years, IRS rules stated that taxpayers could not keep retirement funds in their retirement accounts indefinitely. They must start taking withdrawals from their IRA, SIMPLE IRA, SEP IRA, or retirement plan account when they reach age 70 1/2. These withdrawals are known as required minimum distributions or RMDs. However, the Setting Every Community

Read More »

Tax Tips for Parents and Individuals

As we close out the year and get ready for tax season, here’s what individuals and families need to know about tax provisions for 2022. INDIVIDUALS – TAX CREDITS Adoption Credit In 2022, a nonrefundable (i.e., only those with tax liability will benefit) credit of up to $14,890 is available for qualified adoption expenses for

Read More »

Maximize Tax Savings by Year-End

As we close out the year and get ready for tax season, here’s what you can do to maximize your tax savings by year-end. Personal Exemptions Personal exemptions are eliminated for tax years 2018 through 2025. Standard Deductions The standard deduction for married couples filing a joint return in 2022 is $25,900. For singles and

Read More »

Tax Tips for Retirees and Retirement Accounts

For many years, IRS rules stated that taxpayers could not keep retirement funds in their retirement accounts indefinitely. They must start taking withdrawals from their IRA, SIMPLE IRA, SEP IRA, or retirement plan account when they reach age 70 1/2. These withdrawals are known as required minimum distributions or RMDs. However, the Setting Every Community

Read More »

Tax Tips for Parents and Individuals

As we close out the year and get ready for tax season, here’s what individuals and families need to know about tax provisions for 2022. INDIVIDUALS – TAX CREDITS Adoption Credit In 2022, a nonrefundable (i.e., only those with tax liability will benefit) credit of up to $14,890 is available for qualified adoption expenses for

Read More »