Alternate name: Tax loss carryforwards, net operating loss carryforwards, deduction carryforwards, credit carryforwards
A tax carryforward is basically what it sounds like: You can carry forward losses or excess amounts over the limits set by the IRS into future tax years to reduce your taxable income or your tax bill. It’s one way to help people who suffer financial losses or who contributed a lot of money to something.
Examples of a Tax Carryforward
The New York Times reported in 2016 that former President Donald Trump claimed $916 million in losses in 1995, and federal tax carryforward laws likely allowed him to spread out those losses over 18 years, eliminating or reducing his tax liability along the way. This is just one example—and may be extreme and uncommon—but the ability to spread out losses does exist to help businesses and even individuals endure difficult times and recover more quickly. Here’s a more common example: A state might limit deductions on Section 529 plan contributions to $5,000 for a given year, so a taxpayer’s $8,000 contribution would be only partially deductible. The additional $3,000 could be deductible in a later year, however, if the state offered a tax carryforward provision on Section 529 deductions. Taxpayers can increase the total amount of what is deductible over a longer period of time by carrying forward contribution amounts in excess of their state’s limit.
Types of Carryforward Losses
The most common federal carryforward provisions are investment losses classified as “ordinary losses,” as opposed to long-term losses. A carryforward is also available for charitable donations that exceed the annual limit. The federal adoption tax credit is nonrefundable. It can eliminate any tax you owe the IRS, but you won’t receive a refund for anything that’s left over. You won’t lose any of the balance, however, because any unclaimed/unused portion of the credit can be carried forward for up to five years. Capital losses can be carried forward on your federal return as well. You can deduct up to $3,000 a year in capital losses that exceed your capital gains, and carry forward any balance to a future tax year.
Requirements for Carryforward Losses
The IRS limits what may be deducted to determine if a taxpayer has a net operating loss, which occurs when deductions exceed income. Any of the following are excluded when determining losses:
Any deduction for personal exemptions prior to 2018 Exclusion of gains from the sale or exchange of qualified small business stock, typically allowed under IRS Section 1202 Nonbusiness deductions in excess of nonbusiness income The net operating loss deduction The domestic production activities deduction
