This episode discusses the concept of a capital loss carryover. You might not be familiar with this important term. If you have a capital loss carryover, it is a valuable asset that needs to be treated as such in your divorce.
What is a capital loss carryover? You may be familiar with capital gains. A capital loss is exactly the opposite. When you make an investment in a house, a stock, or a bond, you expect to make money on it. However, all investments have risk, so sometimes, they decrease in value. When you sell an investment for less than what you paid, you have a capital loss.
In previous episodes, we have discussed paying capital gains taxes when you make money on an investment. In contrast, a capital loss allows you to write off future taxes, which is called a capital loss carryover.
Here is an example with simple numbers: You have an investment, and you lost $100 when you sold it. A couple of years go by, and you have a different investment that has a gain of $30. Normally, you would have to pay tax on that $30, but your previous loss will cover those taxes for you. You will still have $70 in losses left over. However, if you sell another investment for a $200 gain down the line, you will not have to pay taxes on the full amount. Your $70 capital loss carryover will reduce the taxable amount to $130. At that point, your capital loss will be exhausted.
Here is the point: capital losses help you offset future capital gains taxes. You can even write off part of your annual income taxes because of your capital loss. Because these losses can lower your tax bill going forward, they are considered an asset. Think of it as a gift card for your future taxes.
Therefore, it is important to be aware of your capital loss carryover during a divorce. If you are not aware you have a capital loss, you cannot negotiate for it, so your spouse would get all of the tax reductions going forward.
How do you find out if you have a capital loss carryover? You can find it on your tax return in Schedule D.
Consider seeking help from an accountant or a certified divorce financial analysist. Then you will not miss something that could benefit you.
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