After so many great years in the stock market, back-to-back downers have left millions of taxpayers with something peculiar: investment losses. We're used to sharing profits with Uncle Sam. But just how willing is he to share the pain of our losses? We've been flooded with questions from readers looking ahead to their 2001 tax returns. The answers may help you, too.
Question: I made some bad stock picks and sold them, losing about $12,000. How much can I write off on my taxes?
Answer: You can eventually deduct all of your losses, but it may take a while. Start on Schedule D of your tax return by using the losses to offset any profits you realized in 2001 (including mutual fund capital gains distributions). Then deduct up to $3,000 of excess loss on your Form 1040, where it offsets other kinds of income, such as your salary. If you still have a leftover loss, you may carry it forward to start the process over next year. Repeat this process until you use up all your losses.
If part or all of your gain turns out to be taxable, it goes on Schedule D, where investment losses can offset it.
Question:I inherited $67,000 in stock in May 2000 and sold it at a $3,000 loss in March 2001. I don't owe taxes on the whole $64,000, do I?
Answer: Absolutely not. When you inherit stock, your basis — the value from which you figure gain or loss on the sale — is generally the stock's value when the previous owner died. Assuming $67,000 was the value at the time the previous owner died, your basis is $67,000. So, when you sold for $64,000, you actually incurred a tax-saving capital loss.
Question:I invested in a company in my Roth IRA that is now almost worthless. Can I write this off for tax purposes?
Answer: Probably not, but there is a chance. To claim a loss, you must close all of your Roth IRAs. If the amount you receive is less than the total you contributed to the accounts (including amounts converted from traditional IRAs), then the difference is a loss. But you can't write it off on your Schedule D. Instead, it's considered a miscellaneous expense that you can deduct if you itemize — and then only to the extent that all of your miscellaneous expenses exceed 2 percent of your adjusted gross income.