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Friday, February 13, 2009

The $3,000 Capital Loss Limit - Is it Time to Raise It?

Since 1978, individuals have been able to offset their excess capital loss each year against up to $3,000 of non-capital gain income. This might be viewed as a pretty good deal in that the gain gets taxed at a lower rate (15% today) while the $3,000 loss taken against wage and interest income might be taken at up to a 35% tax benefit (the current top marginal rate).

But, today, some may think that it is time to update the 30-year old $3,000 amount. Congressman Kirk has once again introduced legislation to raise the limit to $20,000 (H.R. 884). But, the loss limitation is a complicated matter because of challenges in taxing capital gains and losses and the potential for game playing - and the fact that gains at date of death escape income taxation. Also, capital gains and losses are skewed toward higher income individuals. So, for example, despite H.R. 884 being labeled as providing middle class relief, it would provide a larger benefit for higher income individuals because they have more gains and losses. To be geared to the middle class, the larger limit would have to be restricted to individuals below a specified AGI (such as $200,000 MFJ).

I've got a short article on the capital gain limitation, pros and cons for increasing the limit and some alternatvie proposals - Is It Time to Increase the Capital Loss Limitation? The AICPA Tax Insider, 2/12/09.

And, please see a capital gains taxation idea of Professor Jonathan Kesselman, posted at this blog (1/09) - here.

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