Deducting Big Losses a Lengthier Process Than Racking Them Up
Question: At the beginning of this year, I quit my engineering job and began day-trading stocks full time. I lost more than $65,000. All my trades were short term, held for no more than a day. I am married and have been filing joint returns for 20 years. My wife has an income of about $120,000. Can we deduct my $65,000 loss as ordinary income? If I can, what form is needed? Thank you for your early reply.
Answer: You’re still married, huh? Will wonders never cease?
You can deduct your losses--but only $3,000 a year. So in about 22 years, you should be out of the doghouse.
That’s an oversimplification, of course. You can “carry forward” your excess losses, using them to offset capital gains in future years. But given your incredible sense of timing when it comes to investing, you shouldn’t depend on future profits to bail you out.
There is a small silver lining here. Because you went at this quixotic business full time, you probably can write off your investment-related costs--Internet connection, newspaper subscriptions and the like--as business expenses on a Schedule C. To qualify to file a Schedule C, you must have proof that your trading was a full-time business activity in which you actively and continually bought and sold securities for your own account, said Mark Luscombe, analyst for CCH Inc., a tax research firm. Your trading records and your lack of other employment should provide ample proof.
Regular investors--that is, those who still have jobs--can write off investment expenses, too, but they must use a Schedule A and may deduct only expenses that exceed 2% of their adjusted gross income.
Which, when you think about it, isn’t such a bad deal after all. At least those folks won’t be begging their spouses’ forgiveness for the next two decades.
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Having Too Much Cash Is Wonderful Problem
Q: Is it possible to over-invest in retirement accounts? My spouse and I earn $175,000. He’s 38, I’m 30. We own a modest home, maintain an emergency cash account, have no debt and max out our 401(k)s and IRAs. After investing more than $20,000 a year in retirement accounts, we find ourselves with excess cash and are confused about what to do with it. We don’t want to squander it, but we really don’t want any more exposure to stocks. What advice do you have for a couple who want to continue building wealth but who aren’t sure how to take further advantage of our hard-earned money at this juncture?
A: The first step, of course, is to count your many blessings. Having too much cash is a rare and wonderful problem. It’s so wonderful, in fact, that it might move you to give back a little something by boosting your charitable contributions. Many families try to give 2% to 3% of their income to good causes, and some make it a priority to give back 10% if they can.
The next step is to consider sitting down with a financial planner to review your situation. You seem to be on track with your retirement saving, but if you want to retire early you might need to tuck away even more money in taxable accounts to reach your goal.
You can find information about how to choose a financial planner at www.latimes.com/money.
The planner can review the rest of your financial situation and make recommendations.
Given your income, you probably need more liability insurance than the average homeowner because you could be a lawsuit target.
You also should have disability insurance to replace your incomes should you become incapacitated. If one of you couldn’t get along without the other’s income, you might need life insurance as well.
You didn’t say how much of an emergency fund you maintain, but with your high salaries you should consider keeping at least six months’ worth of expenses, and preferably more, in a money market account. The more you make, the longer it can take to find a comparable position if you lose your job.
Some people like to have a year’s worth of expenses saved up as their “take this job and shelve it” money--in other words, a financial independence fund that gives them the freedom to walk away from their jobs when they want.
If all of the above doesn’t soak up your excess cash, then you might consider paying down your mortgage with extra payments toward the principal each month. That could save you thousands of dollars in interest over the long run, while building your home equity.
Last, but certainly not least, make sure you’re not just saving for tomorrow. Take some trips, buy some luxuries, indulge yourself a bit. It’s good to plan for the future, but don’t forget to enjoy the present.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at money talk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk columns, visit The Times’ Web site at www.latimes.com/moneytalk.
