Ace the Registered Tax Return Preparer RTRP Exam 2025 – Tax Pro Awesomeness Awaits!

"Carrying forward" a tax loss enables a taxpayer to utilize that loss to offset taxable income in future years. This means that if a taxpayer experiences a loss in one year, they can apply that loss to reduce their tax liability on income earned in subsequent years. This can be particularly beneficial for taxpayers who have fluctuating incomes, allowing them to manage their tax responsibilities more effectively over time.

The mechanism of carrying forward losses is rooted in tax law policies aimed at providing relief to taxpayers who may face income volatility. By allowing losses to be carried to future years, taxpayers can effectively smooth out their taxable income, ultimately contributing to more manageable tax obligations.

This is distinct from applying a current year's loss to reduce previous years' income, which is referred to as "carryback," and transferring losses to another taxpayer or investing losses in retirement accounts, which are not allowed under current tax regulations. Thus, the ability to “carry forward” losses specifically pertains to offsetting future taxable income.