Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [EA] SEE1: Mastering Tax Carryovers: NOLs, Capital Losses, and Charitable Contributions
Transcript
- Hey, glad you could join me. Imagine a new client walks in. They drop a stack of papers on your desk, and in there is a prior-year tax return with this huge capital loss. They just shrug and say, "Yeah, that was a bad year. Guess that money's gone forever." And you know, looking at that number, that it's not gone. It's a potential goldmine. That's what we're talking about today: tax carryovers. These are the losses and deductions that were too big to use in one year, so the tax code lets you carry them to another year to lower your future tax bills. Forgetting to track these is like leaving cash on the table. And the exam loves to test your ability to handle several of them at once. So where do you even begin when a question throws an NOL, a capital loss, and a charitable contribution carryover at you all at once? It feels complicated, but there's an order to it. A strict order of operations. Think of it like a water purification system. You have to run the water through a series of filters in the right sequence. You start with the big, coarse filter to get the rocks out, then a medium filter for the sand, and finally a super-fine filter at the end. Tax calculations are the same. So let’s walk through that five-step framework. First, before you touch your calculator, just take a breath and identify all the carryovers in the problem. Make a mental list, or jot it down. NOL, capital loss, charitable… okay, got it. This stops you from forgetting one halfway through. Simple. Now for the first filter: capital losses. These are always applied first. You use them to offset capital gains, and then you can use up to three thousand dollars of any leftover loss to reduce your ordinary income. This happens "above the line," which means it directly reduces your Adjusted Gross Income, or AGI. Getting AGI right is everything, because so many other calculations depend on it. Once you have that AGI locked in, you move to the second filter: AGI-limited deductions. The big one here is the charitable contribution. You calculate the maximum amount you can deduct—for example, 60% of AGI for cash gifts to public charities. And you base that percentage on the AGI you *just* calculated in the previous step. That's a crucial link. Okay, AGI is set, and your itemized deductions like charity are calculated. Now you figure out your taxable income *before* applying the Net Operating Loss. So, you take AGI, subtract your standard or itemized deductions… and you get a subtotal. You have to pause here. Don't touch the NOL yet. This is probably the single biggest trap on the exam. The NOL is the final, fine-particulate filter. It's applied last. And it has its own separate limit. You apply the NOL carryover against that taxable income subtotal you just calculated. So, let's look a little closer at the three main types. First, Net Operating Losses, or NOLs. These usually come from business losses. For any NOLs that happened after 2017, the rules are pretty clear. You can't carry them back to prior years anymore. But, you can carry them forward forever. Indefinitely. The catch is the 80 percent limitation. In any year you use an NOL, the deduction is limited to 80 percent of your taxable income *before* you take the NOL deduction. This means you can't use an NOL to wipe out your entire tax bill. You'll always have at least 20 percent of your income left to be taxed. Then we have capital loss carryovers. This is when your capital losses are more than your capital gains. As an individual, you can deduct up to three thousand dollars of that net loss against your other income, like your salary. Anything you can't use gets carried forward... again, indefinitely. And a key detail: the loss keeps its character. A long-term loss stays long-term. And here's a really important rule the exam might test: a capital loss carryover dies with the taxpayer. It can't be passed on to a spouse or to the estate. It just... vanishes. And that brings us to our third type, charitable contribution carryovers. If you're really generous and donate more than the AGI limits allow in one year, you don't lose the deduction for the excess. You can carry it forward for up to five years. Five. That's the big difference. If you don't use it in five years, then it expires. And when you're taking a charitable deduction, you always use up the current year's donations first, before you dip into any carryovers from prior years. And if you have multiple carryovers, you use the oldest one first. Alright, let's make this real with an example. Let's say we have Leo. He's single. In 2025, he has $120,000 in wages, a $2,000 long-term capital gain, and he's carrying over a $10,000 capital loss and a $50,000 NOL from last year. He also made an $80,000 cash donation to a public charity this year. Let’s find his taxable income. Okay, step one: inventory. We have a capital loss, an NOL, and a new charitable gift. Got it. Step two: apply the capital loss to find AGI. His $10,000 loss carryover first wipes out his $2,000 gain. That leaves an $8,000 net loss. He can deduct $3,000 of that against his ordinary income. So, his AGI is his $120,000 in wages minus that $3,000. That gives us an AGI of $117,000. He still has a $5,000 capital loss to carry over to next year. Step three: the charitable deduction. The limit for his cash gift is 60 percent of AGI. So, 60 percent of $117,000 is $70,200. That’s his deduction. He gave $80,000, so the extra $9,800 will be carried forward. Step four: calculate taxable income *before* the NOL. We take his AGI of $117,000. We subtract the 2025 single standard deduction of $15,750, and we subtract his charitable deduction of $70,200. That leaves us with a subtotal of $31,050. Step five: apply the NOL. Remember the 80 percent limit? His NOL deduction is limited to 80 percent of that $31,050 subtotal. That comes out to $24,840. So, he can use that much of his NOL carryover this year. The final taxable income is that $31,050 subtotal minus the $24,840 NOL deduction. The answer is $6,210. He’ll also have a remaining NOL of $25,160 to carry to next year. See how the order makes all the difference? If you had applied the NOL earlier, it would have messed up the AGI and the charitable calculation, leading you to a totally wrong answer. The most common pitfall here is just mixing up the rules. You might accidentally apply the 5-year charitable limit to a capital loss, or forget that the capital loss disappears at death. So here’s a quick way to keep the periods straight. Just remember "CAN-5". Capital losses and NOLs—the C and the N in CAN—CAN last forever. Indefinite carryforward. Charity is a 5-year plan. CAN-5. It helps keep those two categories separate in your head. On exam day, when you see one of these questions, just take a second. On your scratch paper, make a quick table with three columns: Type, Limit, and Period. Fill it in for each carryover in the question. This little bit of organization can save you from a simple mistake under pressure. Look, you're putting in the work, and learning these structured approaches is exactly how you pass. If you want more lessons and thousands of practice questions that break down topics just like this, check out the full study system at Vora Prep dot com. It's a complete app with lessons, questions, and even an AI tutor to help you when you're stuck. It’s free to get started. You're building the right habits. Just keep taking it one concept at a time. You've got this. Talk to you next time.