How can my mom use her $29,000 capital loss carryover?July 17, 2012: 1:03 PM ET
The answer is a bit complicated, says Gil Charney, principal tax researcher at the Tax institute of H&R Block. The dividend income your mom receives from her annuity is most likely taxed at the ordinary income rate. Ordinary income can be offset by capital losses and loss carryforwards only up to $3,000 a year. So, without any additional capital gains, your mom would need another ten years of ordinary income to use up the current carryforward. What's more, says Charney, your mom can't simply sell the annuity to offset the losses because any gain from the sale of an annuity is considered ordinary income, not a capital gain.
Your mom can, however, use the capital loss carryforward to reduce any other capital gains. If your mom has any other capital assets besides the annuity, such as stocks or property, and she sells those for at least $29,000 more than her basis in the assets (generally, what she paid for them) she can use the full loss carryforward to offset those capital gains, says Charney. But he warns not to rush into a sale of capital assets solely for tax reasons (in this case to use up the loss carry forward in your mother's lifetime). "Better to go through her assets carefully to see if now is a good time to sell something," he says. If the assets have the potential to appreciate, that appreciation may be more valuable than writing off the losses.
— Walecia Konrad
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