Ask the Taxgirl: No Money, No Loss?

by Kelly on March 5th, 2007

Taxpayer asks: Hey there! I found your blog entirely through random surfing, and it’s perfect for a question I have right now.

I’ve returned to being a full-time student, after several years of working in the real world. Last year, my income was a big, even 0. I had simply no taxable income. The IRS seems completely unable to accept a return with $0 income, and TurboTax.com, my preferred tax solution, suggested either revising a prior return, to deal with the net operating loss, or to carry it forward.

What do you think I should do? Is it really impossible to file a tax return with no income?

Thanks!
Poor poor college student

Taxgirl says: You can absolutely file a tax return that reports zero income! That said, this is one of those circumstances where I don’t have a lot of facts about your situation so I’m going to speak kind of broadly and make some assumptions.

I’m guessing that the IRS doesn’t so much have a problem with your zero income as your attempt to claim a net operating loss. If you’re a full time student, you have no "real" profession and therefore should not be incurring expenses or losses on say, a Schedule C.

So, beyond a standard deduction, this would mean you’re filing something else - a Schedule D? a Schedule A? That’s probably where the problem lies.

If you’re filing a Schedule D for the sale or disposition of assets, you could have a loss to carry-forward if the sales price of your capital assets sold during the tax year was less than your basis (usually the cost of the asset with some adjustments). However, this only applies to capital assets; personal use assets, like cars or your home, even if sold at a loss do not count as taxable losses for purposes of your tax return. If you do have a taxable loss (most commonly from the sale of stock), it will be limited to $1500 or $3000, depending on your filing status, and you can carry that forward to the next tax year.

If you’re filing a Schedule A instead of taking the standard deduction (unusual but not impossible for a full time student), you are subject to limitations on those deductions. You may carry over certain unused deductions (such as excess charitable contributions) but these are not classified as losses for purposes of a carry forward.

This may seem a bit confusing, but here’s a tip to help sort it out: the IRS likes to match income to deductions. If you have no income, then they will not allow you to claim excess deductions. There’s no point if no tax is due.

If you receive a refund, it is usually because you have paid too much tax into the system and are eligible to get it back (there are some exceptions to this, such as EITC). If you didn’t receive taxable income for which there was withholding, then there is nothing for the IRS to "give back" even if your deductions really do exceed your income, thus no refund and no loss.