A tax carryforward is an IRS or state income tax rule that allows a taxpayer to save an unused deduction, credit, or loss, and use it in a later year. This situation most often occurs when the IRS or a state's revenue department places a limit on the amount that can be deducted for certain items in any one year.
For example, if a state says that a taxpayer may deduct up to $5,000 in Section 529 plan contributions in any one year, an $8,000 contribution would only be partially deductible. In theory, $3,000 of this contribution would miss out on favorable tax treatment.
However, if the state offers a tax carryforward provision on Section 529 deductions, the $3,000 that was over the limit would be deductible in a later year, even if there were no further Section 529 contributions ever made.
The most common Federal carryforward provisions are investment losses classified as "ordinary losses" (as opposed to long-term losses) and the carryforward on charitable donations that exceed 50% of a taxpayer's income. Additionally, a number of the states that offer Section 529 contribution deductions also offer a carryforward provision on excess amounts.
Some tax carryforwards have no time limit and may be used as long as the taxpayer is alive. Other tax carryforwards expire after just a few years, depending on each unique carryforward rule.