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DON'T LOSE YOUR LOSSES

March 30, 2007

There are a lot of ways the tax law can keep you from deducting losses. Individuals can only deduct capital losses to the extent of their capital gains, plus $3,000. If you have losses from a business activity in which you are a passive investor - say, a partnership or an S corporation - you can't deduct net "passive" losses. Other rules limit losses based on your "basis" or your "at-risk" investment in a business.

The silver lining is that these losses aren't gone forever. They carry forward. Capital losses disallowed last year can offset capital gains this year. Disallowed passive losses carry forward to offset future "passive" income. Losses disallowed for lack of basis or "at-risk" investment offset future income from the same business.

When you have these losses, be sure to keep track of the carryforwards and use them in future years. Capital loss carryforwards are tracked on your Schedule D. Passive loss carryforwards are tracked on the worksheets for Form 8582. At-risk losses carry forward on Form 6198. There is no formal worksheet for carrying forward losses from basis limitations on partnerships and S corporations, so you need to track them separately.

When you do your return for this year, make sure you look at last years returns. These carryforwards could make a big difference in how you settle up with Uncle Sam April 17.

This is another installment in our 2007 Filing Season Tips series. Collect them all!

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