Return Preparation 101: A Look at Tax Return Carryover

Return Preparation 101: A Look at Tax Return Carryover

Now that the 2016 tax year came to an end, it’s time for you to plan and make the earliest of preparations for the next tax year, and the best way to start is by reviewing your 2016 tax return. One of the things you should watch out for are tax return carryovers, for it can help you claim some deductions and mitigate your taxes.


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What is a Tax Return Carryover?

A Tax Return Carryover occurs whenever you have expenses which surpasses the annual tax deduction limit. You’re not allowed to take this in full, and you have to carry it to your next or future tax returns, which in this case, can be used for 2017 tax year.

A good example of this is a company which experienced negative net operating income (NOI). Let’s just say that for a startup it’s not easy to make sales, especially if there are many competitors. But then as years gone by, sales increases thus, increasing NOI.

So, as a way for the company to reduce their burden in tax, the taxpayer will apply the loss from their first year to tax returns of current or future years.

Carryback and Carryforward

Carryback and carryforward revolves on how the taxpayer will move his unused portion of tax deduction. Carryforward is being resembled in the example above, where the company applied the loss from their first year to future tax years while carryback moves in a reverse motion, where the taxpayer decides to apply his current loss to previous tax years.

Net Operating Loss

This is considered as the “most common” type of carryover that taxpayers encounter within tax returns. Net Operating Loss happens when the business’s deductions are far more greater than its income, which results tonegative taxable income.

These kinds of losses can be carried forward for up to 20 years, and you can also carry it back 2 years prior from your current tax year. For you to carry net operating loss to preceding tax return, you can file a 1045 form or amend the return by filing 1040X form.

Capital Loss

This often happens when you bought an asset, then the asset was sold in an amount which is lower than the original price. When it comes to capital losses, the margin of amount should be up to $3000 annually. Now, if you think that your capital loss surpasses that amount, then you have to carry those losses for future tax years.

Charitable Donations/Contributions


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The government sets a standard limit when it comes to contribution deductions for charity, which is 50% of the taxpayer’s income. It means that if donation deductions exceeds annual limit, then the taxpayer can carry forward the remaining portion for up to 5 years.