Dow Jones and Portfolio Declines

By: Charles L. Telk Jr., CPA, Senior Tax Advisoremail

As I write this article on Tuesday morning, September 30th, the stock market is in turmoil. Coming off of the single day largest loss in the Dow Jones history, I am fielding calls from nervous and anxious clients asking for tax advice, mostly dealing with investment losses and portfolio declines. If the price of your stock portfolio declines, it is important to remember several facts. When a stock loses value, it is generally not a loss for tax purposes unless you sell it. If you are an individual investor, you are capped at a maximum deductible net capital loss of $3,000 per tax year on your individual 1040. This limit of $3,000 applies whether you are single, head of household or married filing jointly. Any excess is allowed to be carried over to subsequent tax years. If your retirement account, 401(k) or other qualified plan loses value, even if your plan sells the stock, you cannot deduct the capital loss because you generally haven’t paid taxes on these funds in the first place. You can however sell the stocks that your plan owns and re-invest the proceeds into a cash account, but as maddening as it is (and I get more complaints regarding this than any other tax rule), you can’t deduct this loss from your qualified retirement plan/401(k) on your personal 1040. If you are a C-corporation/cooperative that experiences a capital loss, you can only offset this loss against capital gains, if there is any. So if your C-corp/coop sells stock at a loss, you can’t deduct this loss. Now if you have a capital loss in a given year, you can carry this loss back up to 3 years and then forward 5 years to offset against past or future capital gains. But if your C-corp/coop has a capital loss with no capital gains to off-set, then this capital loss is lost with no tax benefit. It should be noted that the recently defeated $700,000,000,000 bailout plan had a provision for certain businesses– mostly banks– to offset their capital losses against ordinary income.  As drafted, it would not affect  cooperatives.  However, until a bill is signed into law, modifications are possible. So, under current law, there are not many tax breaks to deal with a large decline in your stock portfolio or a large capital loss. Everyone’s situation is different. Please call me at (515) 270-1446, or email me, if you have specific tax questions about your investments.