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My child has about $200 in dividend income and $1000 in losses. I know that I can carry forward the loss. However, if I understand things right, if he only had income and no loss, he would not be required to file because he has less than the required amount for a child to file (I think its up to 650 or 700 or so now?) and would owe no tax. However, if I file this year with the loss, that $200 that would have been non-taxable will be absorbed by the loss, reducing the amount of loss. If I do this every year for the next couple of years, earning just a few hundred in dividend income, the entire amount of the loss will be used up on the income that wasn't taxable in the first place. Can I hold the loss and not report it until a year in which he has taxable gain? Am I understanding this correctly?
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My child has about $200 in dividend income and $1000 in losses. I know that I can carry forward the loss. However, if I understand things right, if he only had income and no loss, he would not be required to file because he has less than the required amount for a child to file (I think its up to 650 or 700 or so now?) and would owe no tax. However, if I file this year with the loss, that $200 that would have been non-taxable will be absorbed by the loss, reducing the amount of loss. If I do this every year for the next couple of years, earning just a few hundred in dividend income, the entire amount of the loss will be used up on the income that wasn't taxable in the first place. Can I hold the loss and not report it until a year in which he has taxable gain? Am I understanding this correctly?

No, you don't understand this correctly, but that's understandable since the specifics of your situation are not explicitly described in any of the instructions or publications. If you work through the return, you will discover that you don't actually use the capital loss against the dividend income. The allowable standard deduction gets applied first. You will enter the $1000 loss on the front of Form 1040, but when you complete the capital loss carryforward worksheet, your son will get to carry the full $1000 loss to next year. This will continue until he has a gain to offset the loss or he has income in excess of his allowable (standard or itemized) deduction.

Ira
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I guess I goofed. Most of the income is not dividends as I said before, but is about half short term cap gains and half long term cap gains. On the Sch D it does appear to reduce the loss by the amounts of the cap gains. So, is the situation different for cap gains vs dividends? Am I correct that if his only income is $200 cap gains he is not required to file? With the loss, is he required to file this year?
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If the total of your 1099-B's is greater than the standard deduction + personal exemption ($750 for a dependent child without earned income) you should file. The IRS doesn't know the cost bases for your stock sales until you report them, and assumes $0 cost until you state otherwise.

So, even with a $200 capital gain he might have to file (example: stock sale proceeds $1000, cost basis $800).

If there are gains and losses, they will be netted against each other. If there is a net loss, up to $3000 can be used against other income if needed to reduce taxable income.

If you have a net loss, you must file if you want to establish a carryforward (even though the carryforward does not actually appear on the return).

If this is as unclear as I think it is, just ask your question again.

Ira
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Ira,
Thanks - I will ask my question again, however, you've posed another question that goes along with this.

I'll restate the facts first:
Child's income
One 1099-B is $975 with a basis of $775. Gains ST-$100, LT $100
Second 1099-B is $500 with a basis of $1500 - long term loss $1000
DIV income is $50.

My original question: I was presuming that he is not required to file a return because he did not have $750 in income. Therefore, his $200 capital gain would be nontaxable if I were to factor out the loss completely hypothetically assuming it did not occur.

But, factoring IN the loss, if I fill out the Sch D, the $1000 loss is reduced by the $200 in gains (which it should) resulting in a carryover of $800. If each of the next few years also result in gains of a few hundred dollars only and I keep reducing the carryover each year by those small amounts, then I will have used up all of the original $1000 loss with small annual amounts that were never taxable in their respective years.

Is this what would really happen or am I going wrong somewhere.

Also, perhaps I am misunderstanding his requirement to file. I thought the $750 in income referred to AGI. But you made a reference that if 1099-B reported $1000 with a basis of $200 then he would be required to file.

I hope this makes more sense. Thanks for your help.


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Child's income
One 1099-B is $975 with a basis of $775. Gains ST-$100, LT $100
Second 1099-B is $500 with a basis of $1500 - long term loss $1000
DIV income is $50.

My original question: I was presuming that he is not required to file a return because he did not have $750 in income. Therefore, his $200 capital gain would be nontaxable if I were to factor out the loss completely hypothetically assuming it did not occur.

But, factoring IN the loss, if I fill out the Sch D, the $1000 loss is reduced by the $200 in gains (which it should) resulting in a carryover of $800. If each of the next few years also result in gains of a few hundred dollars only and I keep reducing the carryover each year by those small amounts, then I will have used up all of the original $1000 loss with small annual amounts that were never taxable in their respective years.

Is this what would really happen or am I going wrong somewhere.


That's what would happen. The loss carryover goes from the 2001 worksheet to the 2002 Schedule D, where it's just like any other line on the Schedule D. If the 2002 Schedule D shows gains, the loss will be applied to those gains.

Also, perhaps I am misunderstanding his requirement to file. I thought the $750 in income referred to AGI. But you made a reference that if 1099-B reported $1000 with a basis of $200 then he would be required to file.

The filing requirement is clearly not based on AGI (line 33 of the 1040).

With the facts you've stated, the child has more than $750 gross receipts, but not more than $750 in gross income (line 22 of the 1040). To me that says the child is not legally required to file a return.

I agree with Ira that the child should file a return, for two reasons.

1. Without a return, IRS sees (from the 1099-B's) receipts more than the filing requirement of $750, but knows nothing of the basis. Thus, they have no way of knowing what the child's income really is and may pester him.

2. You gain nothing, except for a few minutes of time, by not filing the return. There is no way to "preserve" a 2001 capital loss intact until the child's Non-Schedule D income is sufficient to use it up.

Phil Marti
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Yes, your questions make more sense now.

I'll restate the facts first:
Child's income
One 1099-B is $975 with a basis of $775. Gains ST-$100, LT $100
Second 1099-B is $500 with a basis of $1500 - long term loss $1000
DIV income is $50.

My original question: I was presuming that he is not required to file a return because he did not have $750 in income.


He does have to file. I'll explain why later.

Therefore, his $200 capital gain would be nontaxable if I were to factor out the loss completely hypothetically assuming it did not occur.

But, factoring IN the loss, if I fill out the Sch D, the $1000 loss is reduced by the $200 in gains (which it should) resulting in a carryover of $800. If each of the next few years also result in gains of a few hundred dollars only and I keep reducing the carryover each year by those small amounts, then I will have used up all of the original $1000 loss with small annual amounts that were never taxable in their respective years.


Correct. Unfortunately, that's the way the tax code is written. You have to combine all your capital gains/losses first before you consider anything else.

Also, perhaps I am misunderstanding his requirement to file. I thought the $750 in income referred to AGI. But you made a reference that if 1099-B reported $1000 with a basis of $200 then he would be required to file.

Correct. Here's a better example. Assume a single, large "day-trade." Buy 1000 shares @$99.50, sell 1000 shares at $100 (ignore commissions). Gain = $500 which is below the filing threshhold. IRS gets copy of 1099-B showing sale for $100,000. I can guarantee that your son would receive a letter from the IRS asking for his missing return.

In your son's case, with $1575 in reported gross income (not AGI), it's possible that it might not be flagged. I don't know if the IRS computers can match SSNs to age, nor whether the computers can assume (based on past filings) that your son might file as a dependent child. If not, then the gross income threshhold you should check against would be $7450 ($4550 std deduction + $2900 exemption).

Hope this is clearer.

Ira
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Thanks. Think I've got it now. I was planning to file anyway just to make sure. Just wanted it clear in my mind so I won't have to keep guessing.

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Ira,
After re-reading your post I guess I do have one more question. I followed everything you said but now not sure what you mean by the last sentence of gross income threshold of $7450.
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A single adult who cannot be claimed as a dependent on someone else's return would have a threshold of $7450. That includes a full standard deduction of $4550 and a single personal exemption of $2900.

Your son, as a dependent, loses the personal exemption (you're claiming it), and has a reduced standard deduction of $750.

After all of the postings it dawned on me that I didn't know if the IRS has the ability to know which threshold applies to your son before he files. On further thought, it's obvious that they do. As soon as your return is processed, his SSN will be matched to the personal exemption you claim for him. When the IRS computers match the income documents (1099s, etc.) with his SSN, they'll know that there is the possibility of taxable income with gross income greater than $750.

If the computers couldn't cross-reference the exemption claim from your return to his SSN, he wouldn't have to worry about filing until he passed the higher gross income level.

Hope this clears things up.

Ira
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Wow, I'm so glad someone is discussing this issue. I was getting ready today to file extensions on our returns because this issue is even more complicated for our family. Based on what I've read so far, let me explain my situation and my conclusion, and then I would really appreciate it if someone could verify that my conclusion is correct.

Facts: My significant other and I live together, but are not and have never been married. We have two minor children together. I file "single" and claim one child as a dependent. My "spouse" files "head of household" status and claims the other child as a dependent. Both children have UTMA brokerage accounts, which had about 6 trades each in 2001. They both received 1099-B's, indicating dividend and interest income of less than $100, but gross proceeds from brokerage transactions of more than $20,000. There is a net loss in both children's cases on these transactions.

My conclusion: What I would have liked to hear is that one parent or the other could have taken the losses on his/her tax return. What I think I'm hearing instead is that each child is required to file his own return with a Schedule D attached, showing calculations for the losses. I was afraid that doing this would result in the parents losing the personal exemptions for the children on their own returns, but as I understand it we can still take the full personal exemptions, and then each child gets a reduced personal exemption on his own return? Are there any other "lost benefits" in this situation besides the fact that there is no income to offset the losses (which are not large enough to carry forward to next year)?

Thanks for any help!
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You are correct. You do not put the loss on your return. The child has their own return. As in my situation, it sounds like even if you don't have enough income to be legally required to file a return, the fact the the IRS is going to see a 1099B for $20,000 they will most certainly question it if you don't file to show your basis producing the loss.

I don't think this has any bearing on personal exemptions. You still get yours and the child still gets theirs.

Even a small loss can be carried forward so I would definitely keep track of it.

I'm certainly no expert but this is my understanding of my situation, which sounds similar to yours.
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I goofed on the exemptions part of your question - I was thinking standard deduction. The child does lose the $2900 exemption but does claim a standard deduction. See the instructions for line 36. In may case he gets $750.
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My conclusion: What I would have liked to hear is that one parent or the other could have taken the losses on his/her tax return. What I think I'm hearing instead is that each child is required to file his own return with a Schedule D attached, showing calculations for the losses. I was afraid that doing this would result in the parents losing the personal exemptions for the children on their own returns, but as I understand it we can still take the full personal exemptions, and then each child gets a reduced personal exemption on his own return? Are there any other "lost benefits" in this situation besides the fact that there is no income to offset the losses (which are not large enough to carry forward to next year)?

Correct. Capital gains/losses can only be reported on childrens' returns. Don't be so sure that the losses aren't large enough to carry forward. If all each child has is less than $750 of interest/dividend income (other than the capital loss), the entire capital loss will be carried forward. You have to work through the capital loss carryforward worksheets.

Ira
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