Tax: Loss Limitation

There are a few things that people should be aware in preparation for getting the maximum amount of tax deduction. One of them is Loss Limitation.

Passive Activity Loss Limitation - For people earning under $100,000 with their MAGI (Modified Adjusted Gross Income), they can deduce a maximum of $25,000 passive activity loss from their ordinary income (such as W2). This for a lot of people come from having a rental property and having to pay a lot of expenses (mortgage included) for mentaining the rental property. However, once above $100,000, that amount starts to phase out $1 for every $2 of MAGI until we hit $150,000. So if you are above this income, which is common in Silicon Valley, you can't really make good use of this.

Capital Loss Limitation - Towards the year end, if you see yourself having a lot of capital gain such as through stock trading, one may consider selling some of the stocks that are at a loss to reduce their capital gain for the year. If you intend to rebuy them, you can rebuy them after 30 days to prevent a wash-sale rule (a stock sold at a loss and repurchases within 30 days can not be used for tax loss purpose). However, there is also a limit to how much capital loss you can claim which is $3,000 (combining both net short-term and long-term loss). If married and filing separately that limitation is $1,500. Anything exceeding the threshold this year you can not claim you can carry that over to the following years. When doing year end trading, most stock trades' settlement occurs two business days after the order is executed. Some people may ask if I sell on the 12/30 do I have a problem that it won't count for the year because it takes two days to settle? Generally, tax law considers the trade date to be on the date when the gain or loss is recognized. And so that means that when calculating taxes for capital gain or loss, it's when the trade is executed not when it's settled.