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Although the tax code contains some exceptions, income is generally taxable in the tax year received and expenses are claimed as deductions in the year paid. But “carryforwards” and “carrybacks” have special rules. In this case, certain losses and deductions can be carried forward to offset income in future years or carried back to offset income in prior years, providing tax benefits.
Here are four examples:
Capital losses. After you net annual capital gains and capital losses, you can use any excess loss to offset up to $3,000 of ordinary income. Remaining losses can be carried over to offset gains in future years. The carryforward continues until the excess loss is exhausted. For example, suppose you have a net capital loss of $10,000 for 2023. After using $3,000 to offset ordinary income on your 2023 return, you carry the remaining $7,000 to 2024. The excess loss is first applied to your 2024 capital gains, and then to as much as $3,000 of your ordinary income. Any remaining loss is carried forward to 2025 and future years.
Charitable deductions. Your annual charitable deductions are limited by a “ceiling” or maximum amount, as measured by a percentage. For example, the general rule is that your itemized deduction for most charitable donations for a year can’t exceed 50% of your adjusted gross income (AGI) (60% for years through 2025). Gifts of appreciated property are limited to 30% of your AGI (20% in some cases) in the tax year in which the donations are made. When you contribute more than these limits in a year, you can deduct the excess on future tax returns. The carryover period for charitable deductions is five years.
Home office deduction. If you qualify for a home office deduction and you calculate your deduction using the regular method, your benefit for the current year can’t exceed the gross income from your business minus business expenses (other than home office expenses). Any excess is carried forward to the next year. Caution: No carryforward is available when you choose the “simplified” method to compute your home office deduction.
Net operating losses (NOLs). Historically, NOLs could be carried back two years and forward 20 years. Under current law, NOL’s can only be carried forward in most cases. Give us a call for help in maximizing the tax benefits of carryforwards or carrybacks.
Please note that this blog is based on tax laws effective in December 2023, and may not contain later amendments. Please contact Cray Kaiser for most recent information.