Can losses on capital gains offset dividend income

snipped-for-privacy@gmail.com (Edward) posted:

The straight answer is that capital losses may be used to offset no more than $3000 of ordinary income.

Because of the wording of your question, you've introduced a complication. _Qualified_ Dividends are basically not taxable if your total AGI is below $32550 ($65100 MFJ), subject to some special limitations.

So "dividend income" being already tax-advantaged if it's "Qualified," introduces that complication I noted.

Those who are fortunate enough to have a combination of capital gains and Qualified Dividends for the year 2008, would have their tax computation completed on the Schedule D worksheet, which - if followed carefully - will properly segregate those tax-advantaged categories and result in a proper final tax due.

But again, the short, correct answer is that "Capital losses may be used to offset capital gains -- plus as much as $3000 of ordinary income."

Bill

Thanks Bill.

I have never understood what is going on in the Schedule D worksheet. Are you saying the $3,000 capital loss will wipe out some of the advantages of the lower rate on qualified dividends before reducing ordinary income? Or does the $3,000 capital loss shave off income in the top bracket, regardless of how much you have in qualified dividends?

rowdy' snipped-for-privacy@xxyz.com (Gil Faver) posted:

Here's as clear as I can state it, at this hour of the night: The consolidated Schedule D entries will mix and match all line item Proceeds, whether ST or LT, Gain or Loss, and arrive at totals. That consolidated figure will be carried to line 13 of the 1040, asnd there report the total net capital gains. This may be a positive or negative figure, depending on TP trading activity for the year.

Separately, Schedule B entries will have shown how much of any dividends are Qualified Dividends -- and that figure will have been entered on line 9b (as a subset to all dividends shown on line 9a).

After all other incoime entries and adjustments are entered, an AGI will be determined. From this amount, either a standard (or itemized) deduction will reduce the figure, and then there will also be a subtraction for exemptions @ $3500 each, currently.

That will create the preliminiary Taxable Income total. But when capital transactions and Qualified Dividends enter into the picture, the next step is to more to the Sch D Worsheet for calculation of taxes.

That starts on line 1 with the Taxable Income, which has been arrived at on line 43 of the 1040.

The 1st step on the 2008 worksheet is to enter Qualified Dividends on Line 2. (Since this is an IRS form, there are some extra lines to cover contingencies, which I will skip.) So the basic computation subtracts the Qualfied Dividends right at the top. However, remember that the total effect of all capital gains and losses has been factored in to the AGI via line 13 on the 1040 ... so there has been an impact prior to this calculation.

Back to the worksheet: Line 13 finally confirms the total Qualfied Dividends, Line 14 subtracts them from the line 1, Taxable Income. So at that point, the Qualified Dividends reduce the total taxable income.

Line 15 confirms that the Total taxable income was less than the $65,100 limit -- and if that is so, the net taxable income is carried directly to line 33. So the Qualified Dividends would not be taxed at all. (Remember, this is for 2008.)

There is a little dance to demonstrate the amount of savings as a result of the Qualified Dividend tax advantage, but the calculated tax from the total on line 15 shortly becomes the final actual tax due.

So, going back to your question, the $3,000 loss against ordinary income

-- if that applies -- will be reflected on line 13 of Form 1040. All subsequent calculations which determine the final tax due, take place on the Sch D Worksheet -- and it is _there_ that the benefit of Qualfiied Dividends is applied.

For that reason, it was impossible to agree with the simple statement from the OP, that "capital gains losses are limited to a $3000 offset of dividend income."

And the shirt reason for that is, there are two kinds of dividend income

-- regular (or normal) and the new Qualfied Dividends, which are extended special capital gains taxation treatment -- and this year, for most taxpayers, result in NO tax. So in those instances, the capital gains losses would be _in addition to the existing tax advantage for Qualfied Dividends.

I'm tired. Hope this is clear. Goodnight all.

Bill

Note: All previous posts elided for brevity.

With the clear mind after a good night's sleep, I apologize for obvious typos ... and would like to amend the reasonably well explained Sch D Worksheet rundown, with the observation that my analysis all started with the OP question which involved a capital loss limited to $3000.

Therefore, in order to make sense relative to Gil Faver's more universal question, my comments about "jumping" to line 33 should be amended to "continue on with the Form instructions, which flow from one's actual numbers for the given year."

Hope that clarifies.

Bill :-)