Blue Haven

Check this part of your 2023 tax return

Stock markets have continued to rise so far in 2024, adding to gains seen in 2023. This is welcome news, but a rising market means rising tax liability. If you have taxable brokerage accounts with unrealized gains, you need to be tax-savvy with how you manage your gains. This brings us back to 2022, a year in which stocks fell 20%. Throughout that year, we wrote about the importance of tax-loss harvesting so that you could use 2022 losses to offset future gains. Well, the future is now; it’s a good time to double check your 2023 tax return and make sure you carried your 2022 losses forward properly.

The value of losses

Up to $3,000 in stock market losses from taxable brokerage accounts can be used against ordinary income. This amount results in tax savings at the following rates:

Any excess amount over $3,000 can be used to offset realized gains or be carried over to the following year and used against that year’s income as well. Consider the following example:

A married couple had realized losses of $20,000 in their taxable brokerage account in 2022. That year they earn $300,000 in taxable wages. They file taxes jointly.

$3,000 of the $20,000 in losses is used to bring 2022 taxable wages down to $297,000. This results in tax savings of $660 ($3,000 * 22% marginal tax rate).

This leaves $17,000 worth of losses remaining, from the original $20,000, that is carried forward into 2023.

The married couple has no realized gains or losses in 2023 and earns $312,000 in taxable wages.

$3,000 of the $17,000 tax loss carry forward is used to bring 2023 taxable wages down to $309,000. This again saves $660.

This leaves $14,000 worth of losses left from 2022 that can be carried forward into 2024.

In 2024, the married couple realizes long-term capital gains of $11,000 on their investment portfolio. This amount would typically be taxed at long-term capital gain rates of 15%, resulting in $1,650 tax owed. However, they still have a $14,000 tax loss carry forward remaining.

Therefore, $11,000 of the $14,000 tax loss is used to cancel out the $11,000 worth of gains. As a result, they pay $0 in taxes related to the investment gains realized in 2023.

This leaves $3,000 left from the original $20,000 loss suffered in 2022, and that remaining amount can again be used to reduce ordinary income earned in 2024.

In total, the $20,000 worth of investment losses from 2022 saves the couple $3,630 in taxes owed. They saved $660 against ordinary income in 2022, 2023, and 2024 ($1,980 total) and did not have to pay any tax on the $11,000 in long-term capital gains (saving $1,650).

The value of tax losses can be incredibly useful for those who want to take gains this year, especially so for retirees who are planning withdrawals from taxable brokerage accounts.

So where can you check your tax loss carry forward?

So if you did take losses in taxable brokerage accounts in 2022 (or any prior year), where can you check to make sure you’re still carrying them forward? That information would be on your Schedule D which captures your gains and losses for a given tax year.

Below, I’ve copied my personal Schedule D from 2019. Stocks fell in 2018 and I did tax-loss harvesting and carried losses into 2019. Note line 6 of my 2019 Schedule D shows a tax loss carry forward of -$23,344 from the previous year (other information redacted):

So be sure to look for your own Schedule D on your latest tax return. If you have a taxable brokerage account with any realized gains or losses and you were required to file a tax return, then you should have a Schedule D. You may not have a Schedule D if you have only retirement accounts.

We did a lot of tax loss harvesting for our clients in 2022, and now that the market has recovered, those past losses are even more valuable. If you think you’re supposed to have a tax loss carry forward on your Schedule D but you don’t, you should contact us and your tax-preparer. Any mistakes on tax returns from the prior 3 years can usually be amended. So if losses from 2022 were not counted properly, you’d still have time to fix the issue.

No one likes losing money in the stock market, but losing out on the tax-advantaged value of those losses is salt in the wound. So look at your recent Schedule D and be sure to reach out to us with any questions by emailing info@bluehavencapital.com.

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