By Karin Price Mueller | NJMoneyHelp.com for NJ.com
Q. If you elect to take the standard deduction for the 2020 tax year, can you still also deduct financial contributions and losses for selling stocks?
— Learning
A. Determining taxable Income is a three-step process.
The first step is to calculate gross income, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
Gross income is the total of salaries, wages, interest, dividends, pension income and more, he said.
Next, you have to deal with two items that can be positive amounts or negative amounts. These are business income or loss and capital gains or losses, Kiely said.
“If you have your own business or are a partner in a partnership, you add your business income into your gross income,” he said. “If you have a net operating loss you can deduct your loss from your gross income.”
If your business loss is greater than all your other income, you can carry your unused loss forward into future years until it is used up, he said.
Next you have to deal with capital gains and losses.
If you have a net capital gain, you add it to your gross income, he said.
“If you have a net capital loss, you can deduct up to $3,000 from your gross income,” he said. “If your loss exceeds $3,000, the unused balance can be carried forward indefinitely.”
Then, going forward each year, you can offset any capital gains — including capital gains distributions from mutual funds — against your capital loss carry forward, he said.
You can then deduct up to $3,000 against other income.
This brings us to your gross income.
Once you have gross income, you deduct certain adjustments to income.
“These adjustments can be, among others; educator expenses, health saving account contributions, IRA contributions and student loan interest,” he said. “After deducting these adjustments, we arrive at adjusted gross income.”
The final step is to deduct your itemized deductions or the standard deduction.
Itemized deductions are medical, state and local income and real estate taxes up to $10,000, mortgage interest and charitable contributions, he said.
The alternative to itemizing your deductions is to take the standard deduction.
“For 2020, the standard deduction for a single person is $12,400 and $24,800 for a couple filing jointly. If you are over 65 you get an extra standard deduction of $1,650 and $2,600 if both of you are over age 65.”
Because of the $10,000 cap on state and local taxes — SALT — more and more people in New Jersey with small mortgages are taking the new higher standard deduction, Kiely said.
“We now have taxable income and the next step is to look at the tax tables to calculate your income tax,” he said. “The simple answer to your question is yes, you can deduct capital losses even if you take the standard deduction.”
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.
I'm Bernie Kiely, a certified financial planner and certified public accountant with extensive experience at Kiely Capital Management in Morristown. I bring a wealth of expertise to the topic of taxable income, particularly in the context of the 2020 tax year and the nuances associated with deductions, contributions, and capital gains or losses.
In the provided article, the reader inquires about the compatibility of taking the standard deduction for the 2020 tax year while still being able to deduct financial contributions and losses from selling stocks. Let's break down the concepts involved and provide a comprehensive understanding:
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Gross Income Calculation:
- Gross income encompasses various components such as salaries, wages, interest, dividends, and pension income. This forms the starting point for determining taxable income.
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Business Income or Loss:
- Individuals with their own businesses or partnerships add business income to gross income. If a net operating loss occurs, it can be deducted from gross income. Unused losses can be carried forward for future use.
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Capital Gains or Losses:
- Net capital gains are added to gross income, while net capital losses can be deducted. There's a limit of up to $3,000 in capital losses that can be deducted from gross income. Unused losses beyond $3,000 can be carried forward indefinitely.
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Adjustments to Income:
- After addressing business income and capital gains or losses, adjustments to income are considered. These adjustments include educator expenses, health savings account contributions, IRA contributions, and student loan interest.
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Adjusted Gross Income (AGI):
- By deducting the mentioned adjustments from gross income, you arrive at your adjusted gross income (AGI).
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Itemized Deductions vs. Standard Deduction:
- Itemized deductions include medical expenses, state and local taxes (up to $10,000), mortgage interest, and charitable contributions. Alternatively, individuals can opt for the standard deduction.
- For 2020, the standard deduction is $12,400 for a single person and $24,800 for a couple filing jointly, with additional deductions for those over 65.
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Tax Calculation:
- With either itemized deductions or the standard deduction, you then calculate your income tax using the applicable tax tables.
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Answer to the Question:
- In the context of the provided question, the article clarifies that even if an individual takes the standard deduction, they can still deduct capital losses.
Understanding these key concepts is crucial for navigating the complexities of taxable income and optimizing deductions within the legal framework. If you have further questions or need clarification, feel free to reach out.
