IRA LIQUIDATION AT A LOSS*
- IRA LIQUIDATION AT LOSS
In this blog, I will use situations covered in the last two blogs regarding taxable social security modified to illustrate a new point: taxability of an IRA redeemed at less than its cost and how the loss may or may not qualify as a tax deduction.
INCOME SITUATION:
Social Security ……......$32,000
Tax Exempt Interest...…16,000
IRA Withdrawal…….…12,002
Capital Gain…………...100,000
Total Income…………..160,002
Adjusted Gross Income:
Social Security ……......$27200 (85% X 32,000)
Tax Exempt Interest.……..…0
IRA Withdrawal…….…12,002
Capital Gain…………...100,000
Adjusted Gross Income..139,202.
Tax after exemptions and standard deduction = 13194 minus $ 40 refund of telephone excise tax.
SITUATION: Suppose that IRA withdrawal of $12,002 came from stocks purchased in the IRA that cost $52002 and resulted in a $ 40,000 loss.
Can the loss be deducted? Not unless this withdrawal completely liquidated all IRAs.
But let’s suppose that it DID liquidate his IRA completely. As a result of complete liquidation, he can deduct it as an itemized deduction.
By doing so, he will lose his standard deduction, so he only benefits to the extent his itemized deduction exceeds his standard deduction. The $ 40,000 loss would be reduced by 2% of his $ 139202 AGI, leaving a deduction of $ 37,216
Result: This reduces the tax from $ 13,194 to $ 8178. So the $ 40,000 loss saved him $ 5016 in tax.
HOW THE TAX WAS CALCULATED:
AGI ………………………….....…..…$ 139202
Allowable IRA Loss…$ 37,216
Personal Exemptions….6,600………43816
Taxable Income…………...…………….95386
TAX CALCULATION
Tax on $ 61300 = $61,300 X 5% or $ 3065
Tax on $ 34086 = $34086 X 15% or $ 5113
Tax on $ 95386 = ………........……………$8178
The taxable income was taxed based on reduced rates for capital gain
The top of the 15% bracket is $ 61,300, so this much of the income was taxed at 5% which is the maximum capital gain rate for people in the 10% or 15% bracket.
After subtracting the $61,300 from taxable income the remaining taxable income is taxed at 15%.
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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.
2 comments:
That is well written. I am glad there are people like you who can make sense out these regulations.
It is unfortunate that the rules are so complicated that even Einstein had to have someone else to prepare his tax return.
The cost of hiring tax pros is almost a tax in itself.
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