How to Carry Over Tax Losses and Deductions

by Denise Caldwell, Demand Media

Tax rules are notorious for being cumbersome and antiquated. Some might say that these associations are the direct result of rules like those governing carryover losses. But if you use the carryover rule to your advantage, you can use old capital losses to offset new gains. You can only do this if you understand the rules and limits to carryover deductions.

Calculate Capital Losses

Step 1

Refer to part II of your previous year's Schedule D to determine if you have any deductible capital losses that are eligible to be carried over to the current year. Compare the amount you actually deducted on your prior year Schedule D to your total deductible expenses. A capital loss is a net loss in a capital asset, and capital losses are usually the only losses which you can carryover. A capital asset is anything used for the personal or investment purposes including but not limited to homes, stocks, bonds and even furniture. When an item is sold, the difference in the value of the asset and the amount it is sold for is a capital gain or a capital loss.

Step 2

Create a ledger to separate your long-term liabilities from your short-term liabilities. Write the name of your long-term capital asset (those held for longer than a year) and the amount of the loss or gain in one column and the short-term gain or loss (those held for less than a year) in another column. Maintain a ledger for each tax year.

Step 3

Complete IRS form 1040X if you omitted from your return ordinary deductions for which you were eligible to claim. Complete lines 1-22 to make changes to make the necessary adjustments to your itemized or standard deductions. Submit your amended return within three years from the date of your original filing to remain within the statute of limitations. Allow eight to 12 weeks for your amended return to complete processing.


Step 1

Add the amounts from the ledger you created for the previous tax year when you had losses that were not deducted. Determine the total amount of your capital losses by combining the totals in both columns, making sure not to exceed $3,000.

Step 2

Deduct any loss of less than $3,000 of part II for a prior year by inputting the short-term losses in part I of Schedule D and the long-term losses in part II of Schedule D; thereby you carrying over both your short-term losses for the previous year. For example, if you claimed $2,700 in capital losses during tax year 2009, you are eligible to carry over $300 in tax year 2010. Do not exceed $3,000 in losses.

Step 3

Attach schedule D to your form 1040 and mail or electronically submit it to the IRS. The timeframe for filing electronic returns is 10 days, and the time frame for mailed returns is six to eight weeks.

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