Can the losses I incurred in a previous year be deducted from my taxable income during the following year?
My realized net loss by December 31 is -$35,000. My understanding is that I will have zero taxes to pay for 2017 because I did not make any money. However, if I earn $100,000 in net profits in 2018, is it possible for me to deduct that $35,000 loss from last year on my taxable income?
The short answer is yes - the long one is it all depends. If you are referring to capital gains and losses then the answer is yes. Under your scenario, you will have up to a 35,000 capital loss carryforward which can be applied against capital gains going forward until it is used up. If you do not have 32,000 in capital gains in 2018 and 3,000 of ordinary income, you would apply 32,000 of the carry forward and have zero capital gains, and then apply the remained of the carry forward against ordinary income.
If you are referring to a business loss, Net Operating Loss, then you may carry that loss backward two years or carry it forward. If you do not wish to apply it backward, you must make a timely election when you file your 2017 tax return. Talks with a tax pro on that issue.
While losses are never fun to experience it is great that you were able to harvest them to use against future gains. The rules around using losses can be complex and it depends whehter you are talking about capital losses or net operating losses so please consult a tax advisor prior to making any decisions. Generally speaking you can carry forward your capital loss to be used to offset future capital gains, if you realize $100,000 in capital gains in 2018 then you would be able to utilize the entire $35,000 loss to offset these gains. If you are referring to using these losses against income, only $3,000 of capital losses can be deducted against earned or other types of income in a given year. I hope that this helps to answer your question!
Timothy Hewitt, CFP®
Senior Wealth Advisor
Five Tower Bridge | 300 Barr Harbor Drive, Suite 175 | West Conshohocken, PA 19428
P: 610.234.2100 | F: 610.234.2099 |www.livemore.net
If you have zero earned income, and zero capital gains in 2017 you will not have to pay taxes. The $35,000 in losses will be carried forward indefinitely until you "use" all of it to offset gains or income. If you EARNED $100,000 in income in 2018 you could use up to $3,000 of your carryforward losses as a deduction to income. However, if the $100,000 came from capital gains, the $35,000 would first be used to "offset" those gains dollar for dollar. You would therefore only pay capital gains tax on $65,000.
The key thing to remember is capital losses are first used against capital gains, anything leftover can be used to reduce taxable income (up to $3000 in 2017).
Yes, it is possible to carry over a capital loss from one year to another (as opposed to a business Net Operating Loss, which can be carried back two years and forward as well, a capital loss is only available to carry over.)
So in the example you give of $100,000 of capital gains, you could offset the $35,000 capital loss from the previous year as a carry over.