Carry Over Tax


Carry Over Tax is the amount of Tax generated at the end of the previous year by the withdrawal of funds that caused further tax liabilities.

For example:

At the end of yr10 all we have left is an IRA, and funds from this IRA had to be withdrawn to satisfy expenses, when we get to the end-of-year calculations, we will have to pay the outstanding income tax on that withdrawal.  Since all we have is the IRA, to pay for those outstanding taxes we will incur further taxes, due to the new withdrawal from the IRA.  In order to prevent repeating the process, we simply carry that final tax liability to the next year (think of it as paying on April 15th). 

This situation occurs anytime a withdrawal made to pay taxes causes more taxes, be it income tax, or capital gains.

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