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Simple English definitions for legal terms
loss carryover
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A quick definition of loss carryover:
A loss carryover is when someone has a year where they lost money on their taxes, and they can use that loss to lower their taxes in future years when they make money. This helps them save money on taxes and can increase their income in the future. Different types of losses can be carried over for different amounts of time, but only losses that were actually realized can be carried over, meaning they have to have been sold or gotten rid of in some way.
A more thorough explanation:
A loss carryover, also known as a loss carryforward, is when a taxpayer carries over a tax loss from one year to future years to offset a profit. This means that if a taxpayer has a capital gain that is smaller than their capital loss in a tax year, or if their expenses are greater than their revenue in a tax year, they will suffer a loss. Under the Internal Revenue Code, losses can be allowed as a deduction with limitations. If the loss is greater than the amount allowed by the tax deduction, it can be carried over to the following years. This creates a future tax relief, which essentially increases the income of a future year.
For example, let's say a taxpayer has a capital loss of $10,000 in one tax year, but the maximum amount allowed as a deduction is only $3,000. The remaining $7,000 can be carried over to the following years to offset any future profits.
It's important to note that only realized losses can be carried forward. This means that if a property loses its market value, but the taxpayer did not sell the property and realize the loss, the loss cannot be carried over.
Different types of loss can be carried over for different numbers of years. For example, net operating losses can be carried forward for up to 20 years to a year in which the taxpayer has a profit. Most states also have their own rules regulating the available period for carryover.