A worked example

The losses that outlived the income

Sam, 52, single, spent three years running a venture of their own at a heavy annual loss, funded out of savings, and stopped working when it ended. $900,000 in pre-tax accounts, $100,000 in a Roth, $1,200,000 in a brokerage account, spending $90,000 a year.

“The business is over and the losses were bigger than anything I earned. Is there anything left to do with them, or did they die with it?”

What the projection shows

Stopping work turns most of the tax bill off: lifetime tax in present value is $53,372, and the first four years owe no federal tax at all. What the year table does not say out loud is what is left over afterwards. A loss under §172 never expires and offsets income of any kind, but there is no income left for it to offset — so the plan finishes still carrying losses it never spends, while $900,000 of pre-tax money waits to be taxed as ordinary income whenever it comes out. The deduction and the tax bill are sitting in the same household and nothing makes them meet. A conversion in the empty years is what would spend one against the other, and no part of this plan asks for one.