Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 03-10-2008, 06:44 PM
TaxGuru's Avatar
Tax Guru
 
Join Date: Jan 2007
Location: New Jersey, USA
Posts: 2,417
Blog Entries: 3
What are "Carry-Over Items" and why are they so important to the 2007 Tax Filing?

What are Carry-Over items?
These are items of deductions that were disallowed in the prior years due to some income limitations placed on these amounts. Taxpayers typically file their tax returns without giving careful thought to the prior years carry-over items. This results in taxpayer losing potential tax deductions causing a computation of higher tax liabilities. Hence, it is important to capture these items and report them in the 2007 Tax Returns. It may lower the Tax Bill or result in a higher tax refund!

What are some examples of Carry-Over items and how they are computed?
There are a lot of these items, however here is a list of the most commonly omitted carry-over items found in prior year's tax returns.

1. Investment Interest
Taxpayers typically incur margin interest on their stock investment portfolio. However, the total interest charged is deductible on schedule A to the extent of investment interest income. Hence, the limitation of this deduction results whenever taxpayers do not have sufficient investment income. This results in a carry-over of investment interest expense into the future years.

The Taxpayer may have sufficient Interest Income in the current year to offset the carry-over disallowed investment interest expense. This will enable the deduction to be allowed on Schedule A.

2. Capital Losses Carry Forward
When Taxpayers incur "net capital losses in excess of $3,0000", the current IRS tax code allows for a current year deduction of only $3,000 with the excess carried over to next year for possible future offset to capital gains

The Taxpayer may be able to absorb the Capital Losses carry-over amounts in the current year to due to some profitable stock trades. Hence, the stock trades in the current year would be shielded from capital gains tax to the extent of the capital loss carryover from prior years/

3. Charitable Contribution Carry-Over
A Taxpayer may have made a substantial charitable contribution in the prior year. However, since the charitable contributions are subject to 50% of the AGI limitation rules, there may not have been sufficient taxable income to write-off the entire amount of the donations made in the prior year.

Hence, the disallowed amounts are a carry over item in 2007. The Charitable Contributions are subject to 50% of the AGI amount. But, it is quite possible that the taxpayer may have made sufficient taxable income to absorb the Charitable Contribution carry-over amounts in the current tax year.

4. Passive Losses Carry-Over
These losses are subject to the income limitations rules. Due to prior years limitations having been exceeded and no passive gains to offset these passive losses, a carry-over of passive losses would be the net result.

It is quite possible that the taxpayer either has a lower income that would enable some or the entire amount of the disallowed passive losses to be deducted in the current year. Alternatively, the Taxpayer could also have had passive gains that would be offset by the passive loss carry over amounts.

5. Net Operating Losses Carry-over
This could have been the result of the taxpayer sustaining a loss in his or her business that was considerably in excess of the taxpayers total earned income in prior years. Due to the NOL limitation rules, the disallowed amount would be carried over for use in the future years.

It is possible that the Taxpayer may have Taxable income in the future that may be offset either partially or totally by the NOL carry-over.

__________________
Find a CPA near you!

Ask TaxGuru Please refer to the legal disclaimer.


Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Ads
Reply



Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
How much of "Medical Expenses" can a Taxpayer deduct on their Tax Returns? TaxGuru Medical 2 02-28-2008 12:41 AM
What are the AGI limits that result in "Phaseout of Exemptions" in 2007? TaxGuru General 0 01-13-2008 04:29 PM
When is a "Divorced Couple" no longer married for Tax Purposes? disa Divorce Tax Issues 0 01-09-2008 08:47 PM
IRS rules that "Certain Payments to Disabled Veterans Ruled Tax-Free" TaxGuru Income 0 12-29-2007 02:29 PM
What are IRS "Section 179 Depreciation limits for 2007"? SusanB Depreciation 2 11-29-2007 03:17 PM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning
 
 
 

» Recent Tax Q&A
No Threads to Display.