what will her AGI be if she has a short-term capital loss carry-over of 1,000 form last year?
The correct answer and explanation is:
To determine her Adjusted Gross Income (AGI) when she has a short-term capital loss carryover of $1,000 from last year, we need to understand how capital loss carryovers affect AGI.
Correct Answer:
Her AGI will be reduced by up to $3,000 of capital losses in total (or $1,500 if married filing separately), but only if she has capital gains or other income to offset.
So, if she has no capital gains this year and at least $1,000 of other income, then:
👉 Her AGI will be reduced by $1,000, the amount of the capital loss carryover.
👉 If her AGI before applying the carryover was, for example, $50,000, then her new AGI would be $49,000.
300-Word Explanation:
Capital losses occur when you sell an investment or property for less than your cost basis. The IRS allows you to use capital losses to offset capital gains, and if your losses exceed your gains, you can use up to $3,000 ($1,500 if married filing separately) per year to offset other income such as wages, interest, or business income.
If your total capital loss is more than the limit you can deduct in one year, the unused portion is carried forward to future years as a capital loss carryover.
In this case, she has a $1,000 short-term capital loss carryover from the previous year. Short-term losses are treated the same as long-term losses in terms of how much can be deducted against ordinary income.
Assuming she has no capital gains in the current year, the entire $1,000 can be used to reduce her taxable income. Therefore, her AGI will be lowered by $1,000. If she had capital gains this year, the loss would first offset those gains before reducing other income.
It’s important to note that AGI is calculated before itemized or standard deductions and is a crucial figure for determining eligibility for many tax credits and deductions. Thus, using the $1,000 capital loss carryover helps reduce taxable income and potentially lowers the overall tax bill.
This strategy is common in tax planning, especially for individuals with investment portfolios who experience market losses.