Taxes What Is a Tax Carryforward? Tax Carryforward Explained By Ken Clark Ken Clark Ken Clark is a former Certified Financial Planner (CFP) with over a decade of experience working in the financial planning industry. He is an expert on student loans, financial aid, and paying for college, and has also authored six personal finance books. Ken is a licensed family therapist specializing in money conflict among couples. learn about our editorial policies Updated on May 17, 2022 Reviewed by Ebony J. Howard Reviewed by Ebony J. Howard Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries. learn about our financial review board Fact checked by Hilarey Gould Fact checked by Hilarey Gould Twitter Website Hilarey Gould has spent 10+ years in the digital media space, where she's developed a passion for helping people understand economics, saving, investing, credit card perks, mortgage rates, and more. Hilarey is the editorial director for The Balance and has held full-time and freelance roles at a variety of financial media companies including realtor.com, Bankrate, and SmartAsset. She has a master's in journalism from the University of Missouri, and a bachelor's in journalism and professional writing from The College of New Jersey (TCNJ). learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Definition and Example of a Tax Carryforward How a Carryforward Works Types of Carryforward Losses Carryforward Loss Requirements Definition A carryforward is a provision in tax law that allows a taxpayer to apply some unused deductions, credits, or losses to a future tax year. The IRS and some states allow carryforwards, sometimes referred to as tax loss carryforwards, net operating loss (NOL) carryforwards, deduction carryforwards, or credit carryforwards. Photo: Tetra Images / Getty Images Definition and Example of a Tax Carryforward A tax carryforward is when a taxpayer can apply some unused tax deductions, credits, or losses to a future tax year. It is meant to help people and businesses reduce their tax liability. Alternate name: Tax loss carryforwards, net operating loss carryforwards, deduction carryforwards, credit carryforwards The New York Times reported in 2016 that President Donald Trump claimed $916 million in losses in 1995, and federal tax carryforward laws likely allowed him to spread out those losses over 18 years, eliminating or reducing his tax liability along the way. This is just one example—and may be extreme and uncommon—but the ability to spread out losses does exist to help businesses and even individuals endure difficult times and recover more quickly. How a Carryforward Works As an example, a state might limit deductions on Section 529 plan contributions to $5,000 for a given year, so a taxpayer's $8,000 contribution would be only partially deductible. The additional $3,000 could be deductible in a later year, however, if the state offered a tax carryforward provision on Section 529 deductions. Note A number of the states that offer Section 529 contribution deductions also offer carryforward provisions on excess amounts. Speak to a financial advisor or contact the appropriate government agency in your state about carryforward provisions there. Taxpayers can increase the total amount of what is deductible over a longer period of time by carrying forward contribution amounts in excess of their state's limit. Types of Carryforward Losses The most common federal carryforward provisions are investment losses classified as "ordinary losses," as opposed to long-term losses. A carryforward is also available for charitable donations that exceed 50% of a taxpayer's income. Note Some tax carryforwards have no time limit and can be used as long as the taxpayer is alive. Other tax carryforwards expire after just a few years, depending on each carryforward rule. The federal adoption tax credit is nonrefundable. It can eliminate any tax you owe the IRS, but you won't receive a refund for anything that's leftover. You won't lose any of the balance, however, because any unclaimed/unused portion of the credit can be carried forward for up to five years. Capital losses can be carried forward on your federal return as well. You can deduct up to $3,000 a year in capital losses that exceed your capital gains, and carry forward any balance to a future tax year. Requirements for Carryforward Losses The IRS limits what may be deducted to determine if a taxpayer has a net operating loss, which occurs when deductions exceed income. Any of the following are excluded when determining losses, according to the IRS: Any deduction for personal exemptions prior to 2018 Exclusion of gains from the sale or exchange of qualified small business stock, typically allowed under IRS Section 1202 Nonbusiness deductions in excess of nonbusiness income The net operating loss deduction The domestic production activities deduction Key Takeaways A portion of some tax deductions and tax credits can go unused because these tax breaks have dollar limits as to how much a taxpayer can claim. A tax carryforward lets taxpayers claim the unused portion of these deductions, losses, and credits in future tax years if they cannot do so in the current tax year.Not all credits and deductions have carryforward provisions.The most common tax perks that enjoy carryovers include the adoption tax credit, the charitable contribution itemized deduction, 529 plan deductions at the state level, and capital losses. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The New York Times. "How a Simple Tax Rule Let Donald Trump Turn a $916 Million." Accessed Jan. 31, 2022. BlackRock. "Take Advantage of Your State Tax Benefits." Accessed Jan. 31, 2022. IRS. "Topic No. 409 Capital Gains and Losses." Accessed Jan. 31, 2022. IRS. "Charitable Contribution Deductions." Accessed Jan. 31, 2022. IRS. "Topic No. 607 Adoption Credit and Adoption Assistance Programs." Accessed Jan. 31, 2022. IRS. "Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts." Accessed Jan. 31, 2022.