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.
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