Losses are subject to limitations, eligibility tests, and exclusions based on a

Question

Losses are subject to limitations, eligibility tests, and exclusions based on a number of conditions and factors. Consider the following scenario: Mary, a single taxpayer, purchased 10,000 shares of § 1244 stock several years ago at a cost of $20 per share. In November of the current year, Mary received an offer to sell the stock for $12 per share. She has the option of either selling all of the stock now or selling half of the stock now and half of the stock in January of next year. Mary will receive a salary of $80,000 for the current year and $90,000 next year. Mary will have long-term capital gains of $8,000 for the current year and $10,000 next year. If Mary’s goal is to minimize her AGI for the two years, determine whether she should sell all of her stock this year or half of her stock this year and half next year.

Explanation / Answer

Investment in stock = 10,000 x 20 = $200,000

Selling the stock = 10,000 x 12 = $120,000

Capital loss = 200,000 – 120,000 = $80,000

For this year Mary’s salary = $80,000

For this year capital gain = $8,000

If she sells all her shares this year then the net capital loss = 8,000 – 80,000 = $72,000

This will offset her entire capital gain this year and additional $3,000 deduction for this year.

So her AGI will be 80,000 + 8,000 – 8,000 – 3,000 = $77,000

Now the left over capital loss 80,000 – 8,000 - 3,000 = $69,000 will carry forward to next year.

For Next year Mary’s salary = $90,000

For Next year capital gain = $10,000

Then the carryforward capital loss will offset the capital gain and additional $3,000,

So her AGI for the next year will be 90,000 + 10,000 – 10,000 – 3,000 = $87,000

Now the left over capital loss 69,000 – 10,000 - 3,000 = $56,000 will carry forward to next year.

If she sells half shares this year and other half next year, then,

Selling the stock = 5,000 x 12 = $60,000

Capital loss = 100,000 – 60,000 = $40,000

So her AGI will be 80,000 + 8,000 – 8,000 – 3,000 = $77,000

Now the left over capital loss 40,000 – 8,000 - 3,000 = $29,000 will carry forward to next year.

So her AGI for the next year will be 90,000 + 10,000 – 10,000 – 3,000 = $87,000

As she will sell half of her shares next year, the capital loss = $40,000

Now the left over capital loss for next year is 29,000 – 10,000 - 3,000 + 40,000 = $56,000 will carry forward to next year.

So in both options her AGI will remain same.

She can choose either of the option.

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