Dear Rick:
I have a tax question that I hope you can help me with. This year I have taken some significant losses on my stock portfolio. A few years ago, I invested a substantial amount of money in a new start-up company. I knew it was somewhat of a gamble, but I was convinced that the stock would take off. Earlier this year the company went into bankruptcy and went out of business. As a result, I have about $100,000 in losses. My tax guy said because I don’t have any gains I can only use a very small portion of the loss. I went to see another tax person and they recommended I withdraw $100,000 from my IRA and use the distribution to offset the taxes. He said it was aggressive but he thought there was a good chance the IRS would let it slide by. My question to you is do you think I should do it and if not, do you have any other suggestions?

Carl

Dear Carl:
I don’t think offsetting your stock losses with an IRA distribution is too aggressive. Rather, I think it is just unquestionably wrong. The laws and regulations are very clear on this point, and that is, other than a nominal $3,000 a year, you cannot offset capital losses, which is a result of the sale of stock, with ordinary income-which an IRA distribution is. The losses you cannot currently use can be carried forward into the future. For example, if the capital losses were $100,000 and you offset $3,000 in the current year, you can carry over $97,000 in losses to future years.

When the tax person told you it was aggressive to offset capital losses with an IRA distribution, it’s sort of like saying that Hurricane Harvey caused some water damage in Houston. The hope that the IRS will let it slide by is not a good way to handle your taxes. After all, if the IRS does not let it slide by and catches you, as I am sure they will, in addition to the taxes you would owe, you would also be liable for interest and penalties.

It is important to remember that you are the one who signs your tax return and is ultimately responsible for its accuracy. Therefore, you have to be careful whom you take tax advice from and whom you let complete your return. Just because someone knows how to complete a return does not mean they’re qualified to give tax advice, and vise versa, just because someone knows tax laws does not make them qualified to prepare returns. Completing a tax return is totally different than giving advice on taxes. Thus, when it comes to taxes, you need to make sure you are dealing with a professional and someone who is dedicated to staying current on our tax laws.

One last thought, and that is a reminder that it is not more patriotic to pay more in taxes than you have to. Our tax laws are constructed so that taxpayers pay the least amount of taxes legally possible. Therefore, when there are gray areas in our tax law, there’s nothing wrong with using them to your advantage. However, you should always make sure there’s some basis in the law for your interpretation. If not, the IRS will eventually catch up with you and not only will they assess you with taxes, interest and penalties, but you’ll also have your fair share of grief that no one wants. The bottom line: yes, it’s okay to be aggressive when it comes to your taxes, just don’t be stupid.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.