The Internal Revenue Service offers a wide variety of tax exemptions, deductions and credits that reduce taxable income tax liability. Some tax deductions and credits have annual limits that prevent you from deducting the full amount of your eligible expenses in a single year. Tax "carryover" or "carryfoward" refers to applying the unused portion of a tax deduction or credit to a future year’s tax return.
Tax carryover lets you claim a deduction or credit for a single expense over the course of two or more years, by claiming the tax break on multiple tax returns. Carryover typically occurs when you have an expense that exceeds the annual limits for a tax deduction or you are unable to use the full amount of tax credit because you have zero tax liability. Many tax breaks are only valid for the year in which you incur the associated expenses. For instance, the government offers a $1,000 Child Tax Credit that cannot be carried over to future years.
If you buy an asset like a stock and sell it at a price that is lower than its original value, you incur a capital loss. Capital losses are tax deductible up to a maximum of $3,000 per year. If your total net loss exceeds $3,000, you can carry additional losses over to future tax returns.
The Department of Energy offers tax credits for installing energy efficient home upgrades including solar panels, small wind turbines, geothermal heat pumps and fuel cells. The credit is valid through 2016 and amounts to 30 percent of the cost of the upgrade. Unused energy efficiency credits on these products can be carried forward to future tax years through 2016.
Donations of cash or property to charity are tax-deductible but the government limits charitable contribution deductions to 50 percent of your income. If your contributions exceed the annual limit, you can carry the excess over up to five years. For example, if a retiree makes $15,000 and gives $12,000 to his church, he can deduct only $7,500 of the donation in the year he makes to the gift, but he can carry the remaining $4,500 over to his next tax return.
Net Operating Losses
A net operating loss occurs when a business owner's deductions exceed his income. Net operating losses can be carried over to future tax years and they can also be carried back to previous tax years. To carry a net operating loss back to a previous return, you can file Form 1045 or amend a previous year’s return by filing Form 1040X.