Carryforwards: Turning Past Losses Into Future Tax Savings

What is a carryforward?

A carryforward lets you apply unused losses or credits from a prior year against income in future years. Common carryforwards include net operating losses (NOLs), capital losses, passive losses, and certain credits.

How carryforwards affect your return

• Lower future taxable income: Reduces AGI or taxable income, improving deductions and credit eligibility.
• Capital loss offsets: Up to $3,000 of net capital loss can offset ordinary income each year; excess carries forward indefinitely.
• NOL limits: Post-2017 NOLs generally offset up to 80% of taxable income with no expiration (subject to law changes).
• Interaction with credits/deductions: Lower AGI may unlock phase-outs (education credits, child tax credit, NIIT thresholds).

Strategies to maximize carryforwards

• Harvest gains in high-carry years: Realize capital gains in years you have large capital loss carryforwards to neutralize tax.
• Time deductions: If an NOL already shelters most income, defer discretionary deductions (charity, business purchases) to next year.
• Coordinate with Roth conversions: Use carryforwards to offset taxable income from conversions at lower effective rates.
• State conformity: Track state vs. federal rules—some states limit or disallow certain carryforwards.
• Entity planning: S corps/partnerships: owners track basis and at-risk rules; unused losses stay suspended until basis is restored.

Recordkeeping essentials

• Maintain a year-by-year carryforward schedule (capital losses, NOLs, credits).
• Track character: short-term vs. long-term capital loss; general vs. AMT credit.
• Reconcile with state carryforward worksheets annually.