If you discover errors in the income, deductions or filing status you reported on a past tax return, you need to amend that return. If you sell investments for a loss, those capital losses are deductible, but the amount of deduction may be limited. Excess capital loss carryover is one type of deduction that could easily result in deduction mistakes for a past return or even multiple returns. Even if you could not use the carryover in one year, you must still amend the return to comply with Internal Revenue Service rules.
Capital Loss Carryover
If you have a capital loss from investments that exceeds your gains for the year, you must first use losses to offset any capital gains and then, if your losses exceed the gains, you can use up to $3,000 in losses as a write-off against other income. Unused losses can be carried forward to future tax years to offset future capital gains or they can be applied at $3,000 per year against your regular income. A large, one-time loss may end up carrying forward for years if you do not have other investment gains in those future years.
No Income Dilemma
It can be confusing knowing how to handle a capital loss carry-forward in a year when you have little or no income to report on your tax return. Your income level may be low enough that you do not need to pay any taxes or even file a return. However, because you have a loss to carry forward, you must file a tax return and declare the loss. If you were in this situation in the past and you did not claim the loss carry-forward because you couldn't use it to offset income, you should amend the past return to show the carry-forward so you can use the losses on your current year or future returns.
Loss Carries Through
You won't lose the carry-forward capital loss just because you need to amend a past return to declare it. If you have no income, for example, your tax return will show the carry-forward loss passing through the no-income year to be used in future tax years. If you missed a year on the carry-forward because you couldn't use the loss, you can't resume carrying the loss forward until you amend the past returns and set the record straight.
Loss of Tax Benefits
The carry-forward amount is compared against your Form 1040 adjusted gross income minus your deductions -- itemized or standard. If your income after deductions for a past year was low but not close to zero, you may be forced to use some or all of your carry-forward losses in a year when your income level puts you in the lowest tax bracket. As a result, the deduction of the capital losses would save you little in taxes. That is the potential problem with going back and amending a return to include the carry-forward, but the tax laws require you to do it.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.