What this line means
The portion of your net capital loss and capital loss carryovers that is reduced because you excluded canceled debt from income. Capital losses are reduced dollar-for-dollar — every $1 of remaining excluded debt eliminates $1 of capital loss. This is the fourth attribute in the Section 108(b)(2) reduction order, after NOLs, general business credits, and minimum tax credits.
Does this apply to you?
- You excluded canceled debt from income and still have remaining excluded debt after reducing attributes on lines 4 through 6
- You have a net capital loss for the tax year of the discharge or capital loss carryovers from prior years
- You sold stocks, bonds, or other capital assets at a loss and planned to carry those losses forward
- You did not elect to reduce depreciable property basis first on line 10b
Easy to overlook
Both current-year losses and carryovers are reduced The reduction applies to your net capital loss for the discharge year and any capital loss carryovers from prior years. If you had $15,000 in capital loss carryovers from bad stock sales, those carryovers shrink or disappear. Filers who were counting on future capital loss deductions to offset gains need to recalculate their tax planning. 1 IRS Form 982 Instructions — Line 7
Capital losses are back to dollar-for-dollar after two credit lines at 33.33 cents After lines 5 and 6 reduced credits at the 33.33 cents rate, line 7 returns to full dollar-for-dollar reductions. This means capital losses are consumed quickly. A $20,000 remaining excluded debt amount wipes out $20,000 of capital losses, unlike the credit lines where $20,000 of excluded debt only consumed about $6,667 of credits. 2 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
Watch out for this
Forgetting to adjust your capital loss carryover on next year’s Schedule D. After reducing capital losses on line 7, your carryforward to the next tax year is smaller. If you enter the old, unreduced capital loss carryover on next year’s return, the IRS will flag the discrepancy. Keep a copy of Form 982 with your records so you use the correct reduced amount.
Footnotes
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IRS Form 982 Instructions, Line 7. https://www.irs.gov/instructions/i982 ↩
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Chapter 1. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩