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.