A client sells stock in December, skips a fourth estimated payment, and files an amended return in April. Three separate planning rules just collided, and each has its own deadline.
Some items can't be fully used on the current return, so the unused part carries over to future returns. Tax planning starts with these carryovers, and the exam tests which ones survive and for how long.
These are the main carryovers an individual can bring to the 2025 return:
Schedule D reports sales of stock and other capital assets. It nets short-term gains and losses together and long-term gains and losses together, then combines the two groups. If a net loss remains, only $3,000 of it can reduce ordinary income, such as wages.
TRAP: A capital loss carryover never expires, but it can't be passed to anyone else. It dies with the taxpayer, so any amount unused on a decedent's final Schedule D is lost to the heirs.
A net operating loss (NOL) arises when a year's deductions exceed income, leaving a loss to use in other years.
Common mistakes
- Applying the 100% harbor to a high earner. When prior-year AGI is over $150,000, the harbor is 110%. Paying $52,000 instead of $57,200 leaves a penalty on the $5,200 difference.
- Believing a December estimated payment cures the year. Estimated payments are credited by quarter, when they're paid. Only withholding spreads ratably across the year, so after a late estimated payment the April and June installments stay underpaid.
- Treating a capital loss as an NOL. Investment losses don't create a net operating loss; only business losses do. A capital loss follows the Schedule D rules and the $3,000 limit, while the NOL deduction is capped at 80% of taxable income.
Bottom line
- Capital losses offset $3,000 of ordinary income per year ($1,500 MFS) and carry forward indefinitely with their original character, but die with the taxpayer.
- An individual NOL comes only from business losses, carries forward indefinitely with no carryback, and is capped at 80% of taxable income.
- A negative QBI carryover reduces the next year's qualified business income as a separate loss business, independent of any NOL.
- Form 8801 grants a minimum tax credit only for deferral-item AMT, limited to regular tax minus tentative minimum tax, carried forward indefinitely.
Exam shortcut
Read the stem for a date before anything else. "Sold on the anniversary date" means short-term, every time. "Prior-year AGI of $310,000" means the 110% harbor, and the distractor will be the 100% figure. "Paid the estimated tax in January" means the earlier installments are still penalized; the right answer will involve withholding or Schedule AI annualization. For carryover questions, ask what generated the item. Business loss means NOL.
The full lesson (about 3,638 words, 24 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
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