Stock losses, how do they relate to Estate distribution.

[tractor]

My MIL's estate held considerable stock at the time of her death. The value continued to drop in the recent market, so the trustee made the decision to sell at a loss (when compared to the value on the day my MIL died).

I don't care about the loss, but we were told that the losses could be used as a tax advantage for the 2023 tax year once the proceeds from the trust are distributed. How does this work? I thought the losses were only usable if we had to pay capital gains taxes (from a stock sale, for example). Do the losses really balance against our standard payroll tax obligation?

[wvugurl26]

The only thing I can think is they could be used against your trust proceeds?

I'm definitely not an expert though.

[haapai]

I appreciate the question. 

Of course I don't know the answer.  If an answer shows up, it might be helpful to know some day. 

[tallguy]

What will likely happen is that you will "inherit" a capital loss.  That will be used first to offset any capital gains you have for the year.  You will then use up to $3000 to offset ordinary income.  Anything remaining will carry over to the next year and will continue to do so until the loss carryover is exhausted.  As an example: 

You have an inherited "loss" of $50,000 from the estate.  Your capital gains for the year are $2000.  Those gains are offset by the inherited loss.  You then use $3000 of the loss to offset ordinary income.  The remaining $45,000 carries over to the next year where the process begins again.

Note that you do not have a choice of whether to use the (up to) $3000 to offset ordinary income.  You must use it even if you have no income to offset, or if your tax liability is already zero.  It cannot be "saved" until needed. 

[Deleted]

Mar 27, 2023 12:33:17 GMT -5 tallguy said:

What will likely happen is that you will "inherit" a capital loss.  That will be used first to offset any capital gains you have for the year.  You will then use up to $3000 to offset ordinary income.  Anything remaining will carry over to the next year and will continue to do so until the loss carryover is exhausted.  As an example: 

You have an inherited "loss" of $50,000 from the estate.  Your capital gains for the year are $2000.  Those gains are offset by the inherited loss.  You then use $3000 of the loss to offset ordinary income.  The remaining $45,000 carries over to the next year where the process begins again.

Note that you do not have a choice of whether to use the (up to) $3000 to offset ordinary income.  You must use it even if you have no income to offset, or if your tax liability is already zero.  It cannot be "saved" until needed. 

Thank you for a great, plain English explanation.  

[tractor]

Mar 27, 2023 15:56:02 GMT -5 soupandstew said:

Mar 27, 2023 12:33:17 GMT -5 tallguy said:

What will likely happen is that you will "inherit" a capital loss.  That will be used first to offset any capital gains you have for the year.  You will then use up to $3000 to offset ordinary income.  Anything remaining will carry over to the next year and will continue to do so until the loss carryover is exhausted.  As an example: 

You have an inherited "loss" of $50,000 from the estate.  Your capital gains for the year are $2000.  Those gains are offset by the inherited loss.  You then use $3000 of the loss to offset ordinary income.  The remaining $45,000 carries over to the next year where the process begins again.

Note that you do not have a choice of whether to use the (up to) $3000 to offset ordinary income.  You must use it even if you have no income to offset, or if your tax liability is already zero.  It cannot be "saved" until needed. 

Thank you for a great, plain English explanation.  

Yes, Thank you. I don't know what our share of the total "loss" will be, but I will factor that into my tax planning for 2023.

[tallguy]

Mar 28, 2023 11:13:05 GMT -5 tractor said:

Mar 27, 2023 15:56:02 GMT -5 soupandstew said:

Thank you for a great, plain English explanation.  

Yes, Thank you. I don't know what our share of the total "loss" will be, but I will factor that into my tax planning for 2023.

I better have it right, because I have been doing this exact thing for the last decade or so.  I will finally exhaust my carryover next year (probably.)  My situation is different because I am retired and intentionally limiting my income, and I cannot go over a certain amount without costing myself quite a bit.  It has made planning for Roth conversions easier since I know in advance that the total of my capital gain distributions will be -$3000 on my tax return.  The exhausting of the carryover will give me some additional flexibility though.  Because I am limiting my income, it is low enough that my tax rate on capital gains would be zero.  Despite that, I have been unwilling to either sell anything from my taxable account or invest in anything (in that account) that will throw off capital gains.  I wanted to use as much as possible to offset ordinary income and not waste the carryover on offsetting gains that would be taxed at 0% anyway.  This does not come into play for you now, but it may become relevant in the future.  Or for someone else in this situation.     

[tractor]

Are you saying this might be a good time to do a Roth conversion?