Question: I plan to file an extension on April 15 because I realized at the last minute that I might be able to deduct stock losses. Is that correct?

A BuyandHolder

Answer:

Dear BuyandHolder,

Yes. Filing an extension buys you time to figure out your unused losses. But be aware -- an extension does not mean you can delay paying the IRS. If you owe the IRS money, the payment deadline remains April 15. You must estimate, as closely as possible, how much you owe and pay that amount when you file your extension on or before April 15.

Incidentally, you are not required to explain why you are filing an extension - simply use IRS Form 4868. You can e-file the form or download a paper version at: www.irs.gov.

What Is A Capital Loss?

For those unfamiliar with the term, a capital loss is the difference between what you paid for an investment and what you received when you sold that same investment. If you sold the investment for less than the price you paid, you have a legitimate capital loss.

Deducting Capital Losses

Now, about your losses...

In terms of taxes, capital losses offset capital gains, dollar for dollar. However, the IRS has an annual limit on the dollar amount you can deduct for capital losses -- the maximum is $3,000 of capital losses, in excess of capital gains.

Or, to explain it another way...if your total capital losses exceed your total capital gains for the year, then you have a net capital loss. Net capital losses are deductible up to a limit of $3,000 a year.

And, you can carry forward unused losses (that is net capital losses in excess of the $3,000 limit) indefinitely and deduct them in later years.

You will find the details spelled out in IRS Schedule D, which you must file with your 1040 return.

Two Tips

When filing your extension and then your final return, avoid making the two most common mistakes. Sign your return. Thousands of taxpayers each year neglect to do so. And second, check and double check your Social Security number. An amazing number of people enter one incorrect figure.

Good Luck!