Alley Dweller
“You are right that by the time you get to line 43 of Form 1040, you will enter a 0 there and the value on line 41 won’t affect the rest of the form. But the negative number on line 41 is needed to calculate how much carryover you have available for the next year.”
Yes, that is the essential thing I didn’t get.
Taxpayer reads 1040 line 41 instruction: “Subtract line 40 from line 38.”
Result: a negative number.
Taxpayer understands negative numbers as re capital gains(+) and losses(-), but the negative seems incongrous here, for calculating tax. Especially since the instruction for line 43 instructs taxpayer to enter zero for line 43, if the calculated result was negative. One tends to think the same would apply to line 41. So in the absence of instructions, taxpayer enters zero.
In effect, the taxpayer thinks “locally,” with line 41 applying to the immediate tax calculation; taxpayer is not aware of the linkage between this negative number and capital-loss carryover calculations. That was my problem.
I’d have avoided this confusion if the line 41 instructions included: “If the result is a negative number, enter the (negative number).”
I’m in the very situation you describe in #2 above, but am trying to find somewhere in the Schedule D directions (other than the worksheet) where it says what you said in #2. Does your reference book give a code section where one could find this…or if you don’t mind, what is the reference book and where in there did you find this. I’m just looking for something official to print off and keep w/ my taxes.
Goodness-I’ve been resurrected, just in time for my 2013 tax return.
I’ve locked into Alley Dweller’s patient explanation, and I think I get it [still]; but I too would be interested in What the … !!!'s reference source.
I have been in your situation. I really would recommend that you start to use one of the major tax prep software programs. If you stay with the same program year after year (that is why I said “major”), it keeps track of things like capital loss carryovers for you from year to year to year. It will handle the situation you describe correctly, without you having to try to figure it out.
I know they can seem kind of steep at $40 or $50, but sometimes you can find a deal and I feel it is worth it not trying to decipher the worksheets. The programs are really simple to use, especially if you are already familiar with the tax forms and what the specialized terms (like “capital loss carryover”) mean, which you obviously are.