Losses – a word that has become all too familiar these days.
If you have losses in 2010 or recent past years are you ensuring that you maximize the opportunities that might be available to you to claim some or all in your federal return?
These might be in the form of net operating losses, losses from casualty or theft, or capital losses.
Knowing how to use these, and in particular, knowing what the carry-forward and carry-back rules are for each type of loss could make a big difference to your taxable income and thus your tax liability for any given year.
If a loss is claimable it is an above-the-line deduction or a deduction for AGI (adjusted gross income).
As mentioned above, each category of loss comes with its own set of rules. In particular, application of the rules for determining basis and the at-risk rules before applying other specific rules can limit the amount of loss that is otherwise able to be claimed by a taxpayer.
One of the more common types of losses is a loss from rental property investment. Under the passive activity loss (PAL) rules, this type of loss cannot be offset against non-passive (active) income, although as usual, exceptions do exist.
One exception is that up to US$25,000 – single or joint returns – of the loss may be available for offset against non-passive income. This is phased out for AGI between US$100,000 and US$150,000.
Unutilized PAL is then carried forward to the next year in which the rules are reapplied in the respective year.
A Net Operating Loss (NOL) is a federal tax term for a loss from business operations in which expenses exceed income. An individual, corporation, partnership, estate or trust can have a NOL.
Certain adjustments are required by individuals to compute the NOL, including the add-back of capital losses, personal exemptions and other non-business deductions such as alimony.
For the 2010 tax year, the NOL is carried back to the two years preceding 2010 (ie 2008 and 2009), with any residual loss carried forward for up to 20 years. The carry-back requirement can be waived so that the loss is carried forward only, although this waiver is irrevocable once done.
For individuals, capital losses can’t be carried back and once any offsets within the respective category under the rules for capital gains and losses have been made, capital losses are carried forward to future years. However, up to US$3,000 of net capital loss may be able to be offset against ordinary income in the current year.