Picking and choosing NOL carryforward amount

[rkhan71]

Does anyone know the exact tax law on whether you can pick and choose the amount of the NOL for a particular year?

An example:

If the total income from sources for a year is $55,000 and the taxpayer has ample NOL carryforward balance, can they pick the amount to choose from NOL balance, and then use the remaining itemized deductions value to offset the difference? So, if the total income is $55K and itemized deductions is $26k, can they only pick $29K of the NOL balance available (on page 1 of 1040), and then carry forward any of the remaining NOL balance for the next year(s) as needed? I am under the impression that the taxpayer has to use the NOL balance to offset the total income amount; no choice to pick and choose.

Thanks in advance for your help.

RFK

[Snaggletooth]

Extinguish as you go

Answer is "no" I don't know the exact tax law.

However, I can tell from an attempt early on, that you have to use the NOL to extinguish the entire income before using any of it later years.

Otherwise, you could use only enough to bring the income down to the filing threshold, thus wiping out a taxpayer's tax liability but not wiping out all his income.

Nice try - and congrats for original thinking.

[rkhan71]

More thought NOL

Snaggletooth - thank you very much for your input.

Given your thoughts and response, I am having a little difficulty distinguishing between use of "total income" and "taxable income" to use the NOL figure for the particular year. So, if the "total income" was $55k (line 22 of 1040), and the NOL carryover was enough to reverse that amount out (using NOL amount on line 21), what about the itemized deductions (legitimate ones) to reduce "taxable income" to $0? I am getting confused about how much NOL is applied on line 21 against income sources, and the remaining income that is coordinated with items that can be used from itemized deductions to reduce taxable income to zero. Part line 21, and part itemized deductions. Otherwise, we would ending using a large chunk of NOL to reduce total income, and none of the legitimate parts of itemized values. I need clarification on this particularly. Hope the question and thought makes sense.

Thanks again in advance.

RFK

PS: Maybe I am not reading the pubs correctly, but some of this stuff is not explained very well on the mechanics of doing these sort of calculations. Very frustrating.

[TaxGuyBill]

I agree with Snaggletooth, you can't pick and choose what you want to take.

I am not very fluent with NOLs, but the calculation starts with Line 41 of the 1040, then makes adjustments.

In other words, it starts AFTER the itemized deductions have already been taken into account. So you essentially will NOT 'lose' your itemized deductions (you essentially WILL lose your 'exemption').

You can fill out Schedule A of Form 1045 to see how it works.

https://www.irs.gov/pub/irs-pdf/f1045.pdf#page=3

https://www.irs.gov/pub/irs-pdf/i1045.pdf

https://www.irs.gov/publications/p536/ar02.html

[Roland Slugg]

An individual's NOL is a single, lump-sum amount that is deducted in full on F-1040, line 21, It's pretty much the same as any other business loss. If the NOL deduction is more than a taxpayer needs to zero-out his taxable income, because he has itemized deductions that will be rendered partially or entirely unused, nothing can be done about it. An NOL is often very "costly" in that situation. The best way to avoid that from happening is to do better tax planning regarding the itemized deductions ... delaying their payment whenever possible, and, thus, shifting them to the following year when they might be usable.

I have never found NOLs difficult to understand or calculate, but I did find your second post to be quite confusing and unclear. You may wish to step away for a day or two, then take a fresh look. Also, your references to "total income" and "taxable income" are unnecessary and are, apparently, the source of your difficulty.

[rkhan71]

Thanks Roland

This stuff is confusing because the pub gives "direct" how to calculated examples (which makes senses), but does not go into the scenario of NOL example I need (everything but mine). I just need a simple clarification. I think for my needs this exercise really needs to be discussed with a live person;but appreciate your thoughts.

I am going to try and talk to a local practitioner or two and see what their advice is on my questioning (in person). I do appreciate thoughts from the community. Some of the tax prep and its issues is not easily asked because, I hope you folks agree that tax law is not that easy to understand - some of it can be very convoluted.

Thanks, again, folks.

PS: One client's nephew asked four different practitioners about a concerned tax issue, who gave four different answers. He finally went with the last one - a CPA whom he felt most comfortable having given the best, logical answer. Client's nephew has a Master's in Physics. So he used his logic to ascertain the best route.

[Snaggletooth]

A simple Example

I believe you are craving an example to make this simple, as I never did very well reading IRS sources either. Assume MFJ with 0 dependents.

NOL occurring in 2013 is ($155,000) and AGI aside from the NOL would have been $80,000. That means the NOL carryforward is $75,000.

AGI in 2014 before the loss is $45,000. This means ($45,000) of the NOL must be used, meaning another $30,000 can be carried forward to 2015.

If I understand your original thought: Suppose you could choose to use whatever portion of the 2014 available NOL of $75,000. With AGI before the loss of $45,000 you could choose to use only $24,700. That would reduce AGI to $20,300, and after subtracting the standard deduction of $12,400 and $7900 personal exemption, that would accomplish two wonderful things: 1) 2014 taxable income reduces to zero, and 2) $50,300 of the NOL would be preserved for 2015.

But no, you can't. If the AGI in 2014 is $45,000, you have use all of this amount and leave only $30,000 for 2015.

[Burke]

Snag, I think you hit the nail on the head. Pretty clear. Hope he sees reply.

[rkhan71]

Snaggletooth, I will...

I will take it from here. I appreciate your generous time in helping.

RFK

[rkhan71]

Snaggletooth, I will...

I will take it from here. I appreciate your generous time in helping.

RFK