Using Carryforwards Strategically to Reduce Future Tax Bills

Quick overview

Carryforwards move tax benefits you couldn’t use in one year into future years. They help smooth taxable income across cycles, reduce taxes when you have higher income, and preserve the value of losses or unused credits. Common carryforwards include net operating losses (NOLs), capital loss carryovers, and certain unused business tax credits.

This article explains how common carryforwards work, legal limits you must watch, practical strategies I use with clients, and an easy checklist to take action. This is educational information and not individualized tax advice—consult a tax professional for your specific situation.

How carryforwards work (practical mechanics)

• Net operating losses (NOLs): If business deductions exceed business income in a year, the excess can form an NOL. Under current law, most NOLs arising in tax years beginning after 2017 can be carried forward indefinitely, but the NOL deduction is generally limited to 80% of taxable income for tax years beginning after 2020. Temporary exceptions (for example, CARES Act relief covering certain years) have occurred, so you should confirm rules for your specific tax year with the IRS (see IRS guidance on NOLs) (IRS: Net Operating Losses). For detailed FinHelp coverage, see our guide on Net Operating Loss (NOL) Carrybacks and Carryforwards.

• Capital loss carryovers: When capital losses in a year exceed capital gains, the excess can shelter up to $3,000 of ordinary income per year ($1,500 if married filing separately). Any unused loss carries forward indefinitely until exhausted. You report capital gains and losses on Schedule D (Form 1040) and carryovers appear on the next-year Schedule D as well. The IRS explains capital gain and loss rules in Topic No. 409 (IRS: Capital Gains and Losses).

• Tax credit carryforwards: Many credits are refundable (give you a refund) or nonrefundable (reduce tax to zero but no refund). Nonrefundable credits you can’t use in a year often either expire or can be carried forward under specific rules. Carryforward length and rules vary by credit—some business credits have long carryforward periods. Always check the credit’s rule and IRS instructions (IRS: Business Tax Credits).

• Interaction with other limits and rules: Some statutory limits can affect your ability to use carryforwards. For example, the excess business loss limitation for noncorporate taxpayers can restrict current-year business deductions and push excess amounts into an NOL, which is then carried forward (see FinHelp’s Excess Business Loss Limitation). Also watch for changes in tax rates and AMT/other adjustments that can affect the after-tax value of using a carryforward in a particular year.

Real-world examples (simple, illustrative)

1) NOL example

• Year 1: Small business has a $50,000 net operating loss.
• Under current carryforward rules, that $50,000 is carried forward. If Year 2 taxable income (before NOL) is $60,000, and the applicable rules limit the NOL use to 80% of taxable income, you could deduct up to $48,000 of the NOL in Year 2 (80% of $60,000) and carry the remainder forward to later years.

2) Capital loss example

• Year 1: You sell investments and realize $12,000 in net capital losses.
• Year 2: You have $4,000 of capital gains and ordinary income of $70,000. You first offset the $4,000 gains with the capital losses, leaving $8,000. You can then use up to $3,000 of that remaining loss to offset ordinary income in Year 2, with $5,000 carried forward indefinitely.

These simplified scenarios show why timing and planning matter. In my practice I often model two or three-year projections to decide whether to accelerate or delay certain sales, expense recognition, or business actions to maximize the tax benefit of carryforwards.

Who benefits most

• Individuals with large investment losses or irregular capital gains.
• Startups and seasonal businesses that may have big early losses but expect future profits.
• Professional practice owners and pass-through entities where taxable income can swing widely year to year.
• Businesses with credits they can’t use immediately.

If you have variable income, carryforwards are one of the most powerful tools for smoothing taxes and protecting value from downturns.

Practical strategies to use carryforwards strategically

1) Track and document everything now

• Keep an organized record of loss calculations, year-end statements, and return workpapers. For capital losses, retain trade confirmations and broker statements that show dates and cost basis. For NOLs, preserve profit-and-loss statements and tax return workpapers that support the loss.

2) Model multiple scenarios

• Run taxable-income forecasts for upcoming years and model how a carryforward will reduce tax under different income scenarios. That helps decide whether to harvest more losses now or wait for a higher-income year when the deduction has greater value.

3) Time gains to use losses

• If you expect a year with significant realized gains (for example, liquidating a position), consider using prior capital loss carryforwards in the same year to neutralize gain recognition. Conversely, if you have losses available, avoid realizing small gains that would waste carryforwards unnecessarily.

4) Coordinate with other tax planning moves

• Combine carryforward planning with retirement contributions, charitable donations (donating appreciated stock can preserve basis and avoid realizing gains), and entity-level decisions (for example, whether to keep an activity active or liquidate).

5) Evaluate carrybacks where allowed

• Occasionally, carrybacks (applying a loss to prior years and amending returns) are available for specific years or under temporary law. If a carryback is permitted and will produce a refund at attractive interest or tax rate environments, it may be worth pursuing. Forms and timing rules vary—some carrybacks require an amended return (Form 1040-X or 1120-X) or an application like Form 1139/1045.

6) Use business credit planning

• For unused business credits, determine whether it’s better to accelerate income or push credits forward based on expected future rates and profitability. Some credits have limited carryforward windows—treat those like a perishable asset.

Reporting and documentation basics

• Capital losses: Report them on Schedule D and Form 8949 when required. Any carryover is noted on next year’s Schedule D.
• NOLs: Keep a worksheet that ties the NOL on each return to the carryforward amount. When NOL carrybacks are allowed, there are specific forms and time limits for claiming refunds.
• Credits: Follow the credit-specific IRS form instructions and retain supporting documentation in case of audit.

When in doubt, work with a preparer who will prepare and retain a carryforward worksheet—this avoids re-creating the calculation in future years.

Common mistakes and pitfalls

• Assuming carryforwards “expire” under all circumstances: Capital losses generally carry forward indefinitely, but many credits have time limits. NOL rules vary by year and legislation.
• Failing to consider the 80% limitation for recent NOLs: For NOLs arising in tax years after 2017, the deduction may be limited to 80% of taxable income in years beginning after 2020—check the tax year rules before planning (IRS: Net Operating Losses).
• Neglecting the interaction with excess business loss rules: Noncorporate taxpayers may hit annual limits that convert an otherwise current deduction into an NOL carryforward.
• Poor recordkeeping: Without proper documentation you may not be able to substantiate a carryforward in an audit, losing the benefit.

When to get professional help

If your business or investment activity produces material losses or you’re juggling multiple carryforwards, a tax professional can:

• Build year-by-year projections showing the best years to use carryforwards.
• Prepare carryover worksheets and ensure the correct forms and schedules reflect the carry.
• Identify opportunities to pair carryforwards with credits, entity restructuring, or timing adjustments.

In my 15+ years advising clients, the single biggest mistake I see is waiting to organize carryforward records until years later—when the opportunity to plan optimally has passed.

Quick checklist to apply carryforward planning today

• Gather last 3–5 years of tax returns and year-end statements.
• Identify any remaining NOLs, capital loss carryovers, and unused credits.
• Model your expected taxable income for the next 2–3 years.
• Decide whether to accelerate or delay sales/expenses to maximize the value of carryforwards.
• Discuss with your CPA or tax advisor whether carrybacks are available for any of your losses.

Where to read the authoritative rules

• IRS — Net Operating Losses (NOLs): guidance and rules on carryforwards and limitations (IRS: Net Operating Losses).
• IRS — Topic No. 409, Capital Gains and Losses: explains the $3,000 ordinary income offset and carryover mechanics (IRS: Capital Gains and Losses).
• IRS — Business Tax Credits: details for many common credits and their carryforward rules (IRS: Business Credits).

Also see FinHelp’s in-depth guides on related topics: the Net Operating Loss (NOL) Carrybacks and Carryforwards page and our article on Capital Loss Carryover for step-by-step examples and reporting tips.

Bottom line

Carryforwards are an important, often-underused planning tool that lets taxpayers preserve the value of losses and unused credits. With good records, basic multi-year modeling, and timely professional advice, you can convert a bad year into a future tax advantage. Tax laws change; always verify the rules for the tax year in question and consult a qualified tax advisor.

Professional disclaimer: This article is for educational purposes only and does not constitute tax advice. For guidance tailored to your situation, consult a licensed tax professional or CPA.

Authoritative sources and further reading

• IRS — Net Operating Losses (NOLs): https://www.irs.gov/ (search “net operating loss NOL carryforward”)
• IRS — Topic No. 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409
• IRS — Business Credits and their instructions: https://www.irs.gov/businesses/small-businesses-self-employed/business-tax-credits