Carrying back casualty loss
|  Dear
Tax Talk,
My client has large losses as a result of thefts by his
stockbroker. My client is a casual investor and intends to write these losses
off as casualty loss -- not capital loss. Can losses not used up against
2006 income be carried back to prior years (three years) and forward (20 years)
or is such carry back available only to businesses? Thanks.
-- Christian
Dear Christian,
Casualty losses such as a loss
from a theft are an itemized deduction on an individual's Schedule A. Losses that
can be carried back to prior years to recover taxes paid in those years are known
as net operating losses (NOL). An individual's NOL usually comes about from business
losses such as from Schedules C, E or F.
However, an individual
can generate a NOL through a casualty loss deduction. Several adjustments to an
individual's taxable income are required to compute the NOL, but casualty losses
are not subject to adjustment or limitations when it comes to calculating the
NOL. Hence, if your client has negative taxable income he can use the NOL to recover
taxes paid in prior years. Generally, if you have a NOL for
a tax year ending in 2006, you must carry back the entire amount of the NOL to
the two tax years before the NOL year (the carry-back period), and then carry
forward any remaining NOL for up to 20 years after the NOL year (the carry-forward
period). You can, however, choose not to carry back a NOL and only carry it forward.
You would choose to carry forward the loss if there wasn't sufficient benefit
gained (i.e., not getting a big tax refund) by carrying it back. Use Form
1045 to carry back a NOL. To ask a question on Tax Talk,
go to the "Ask the Experts" page,
and select "taxes" as the topic. | 
