Tax deductions are typically taken only in the years that these expenses are paid. However, due to limits on the deduction of certain items, certain excesses in these categories are carried forward. The types of personal deductions with possible carry-forward amounts include charitable contributions, capital losses, and passive losses. In addition, some types of business deductions are also limited and any excess carries forward.
Your itemized deduction of charitable contributions is limited to 50 percent of your adjusted gross income. Some types of donations are limited to 30 percent or 20 percent. A contribution amount that exceeds the threshold is carried over for up to five years. Any carried forward amount that you don’t use because of the income limitation expires after the fifth year. You must deduct allowed contributions for the current year before using any carryover amount. You should use the carryover from the earliest year if you have amounts for more multiple years.
Selling investment or business property for less than your cost typically causes a capital loss. You can deduct capital losses from capital gains. When your capital losses exceed your capital gains, you can use up to $3,000 per year of capital loss to offset other types of income. This figure is reduced to $1,500 for married filing separately. Any capital loss that exceeds this threshold is carried over until completely used by offsetting capital gains or other income up to the $3,000 limit.
Passive losses arise from the ownership of rental property or part of a business activity in which you do not participate. You can only deduct passive losses against passive gains or upon disposing of the passive activity. A passive loss amount is carried forward until used for offsetting future passive gains. Any income from a passive activity or sale of the activity for a gain is passive income. Alternatively, cumulative passive losses in a single activity are deducted in the year you dispose of the activity entirely.
Tax deduction is limited for some types of business expenses. For example, a deduction under Section 179 of the cost for commercial equipment is limited to the amount of business profit. Any excess is carried over to deduct against profit in future years. A deduction for using part of your home for business has the same limitation. Disallowed home office deduction is carried forward to offset future business profits. A self-employed business owner contributing more to a retirement plan than the allowed deduction carries over the excess for deducting in later years.
- Journal of the American Academy of Matrimonial Lawyers, Tax Carryovers: Important Assets to Consider in High Income and High Asset Divorce Cases or Valuation Nightmare, Wayne P. Kerr, September 19, 2002
- IRS.gov: Publication 526
- IRS.gov: Capital Gains and Losses
- IRS.gov: Passive Activity Loss ATG
- IRS.gov: Publication 946
- IRS.gov: Publication 587
- IRS.gov: Publication 560
- Deductions on a Joint Tax Return
- What Is a 501 C (6) Organization?
- What Is the Maximum Upper Limit for Charitable Federal Tax Deductions in the United States?
- Do Capital Gains Report on a Schedule C for Rental Property?
- How to Calculate Capital Loss Carryover
- "If I Received a 1099-MISC, Which Tax Forms Do I Need to Fill Out?"
- Are Donations to Non-United States Organizations Tax-Deductible?
- What Is the Maximum IRS Charitable Deduction?