Line 5(p2)

If you used Schedule J to figure your tax for:

• 2009 (that is, you entered the amount from the 2009 Schedule J, line 23, on line 44 of your 2009 Form 1040, on line 41 of your 2009 Form 1040NR, or on Form 1040X for 2009), enter on line 5 the amount from your 2009 Schedule J, line 11.
• 2008 but not 2009, enter on line 5 the amount from your 2008 Schedule J, line 15.
• 2007 but not 2008 or 2009, enter on line 5 the amount from your 2007 Schedule J, line 3.

If you figured your tax for 2007, 2008, and 2009 without using Schedule J, enter on line 5 the taxable income from your 2007 tax return (or as previously adjusted by the IRS, or corrected on an amended return). But if that amount is zero or less, complete the worksheet on page J-3 to figure the amount to enter on line 5.

If you did not file a tax return for 2007, use the amount you would have reported as your taxable income had you been required to file a tax return. Be sure to keep all your records for 2007 for at least 3 years after April 18, 2011 (or the date you file your 2010 tax return, if later).

Any net capital loss deduction on your 2007 Schedule D, line 21, is not allowed for income averaging purposes to the extent it did not reduce your capital loss carryover to 2008. This could happen if the taxable income before subtracting exemptions—shown on your 2007 Form 1040, line 41, or your 2007 Form 1040NR, line 38 (or as previously adjusted)—was less than zero. Enter on line 2 the amount by which your 2007 capital loss carryover to 2008 (the sum of your short- and long-term capital loss carryovers) exceeds the excess of the loss on your 2007 Schedule D, line 16, over the loss on your 2007 Schedule D, line 21. If you had any Net Operating Loss (NOL) carrybacks to 2007, be sure you refigured your 2007 capital loss carryover to 2008.

If you had an NOL for 2007, enter the amount of that NOL from line 25 of the 2007 Form 1045, Schedule A, you filed with Form 1045 or Form 1040X. If you did not have an NOL for 2007, enter the portion, if any, of the NOL carryovers and carrybacks to 2007 that were not used in 2007 and were carried to years after 2007.

John Farmington, who is single, did not use income averaging for 2007, 2008, or 2009. For 2010, John has $18,000 of elected farm income on Schedule J, line 2a. The taxable income before subtracting exemptions on his 2007 Form 1040, line 41, is $4,250. A deduction for exemptions of $3,400 is shown on line 42, and line 43, taxable income, is $850. However, John had a $21,450 NOL for 2008, $9,000 of which was remaining to carry to 2007 after the NOL was carried back to 2006. To complete line 1 of the 2007 Taxable Income Worksheet, John combines the $9,000 NOL deduction with the $850 from his 2007 Form 1040, line 43. The result is a negative $8,150, John's 2007 taxable income, which he enters as a positive amount on line 1 of the 2007 Taxable Income Worksheet.

When John filed his 2007 tax return, he had a $3,000 net capital loss deduction on Schedule D, line 21 (which was also en tered on Form 1040, line 13), a $7,000 loss on Schedule D, line 16, and a $4,000 capital loss carryover to 2008. However, when John carried back the 2008 NOL ($9,000 of which was carried to 2007), he refigured his 2007 capital loss carryover to 2008 as $7,000. John adds the $3,000 from Schedule D, line 21, and the $7,000 carryover. He subtracts from the $10,000 result the $7,000 loss on his Schedule D, line 16, and enters $3,000 on line 2 of the worksheet.

John had $850 of taxable income in 2007 that reduced the 2008 NOL carryback. The $3,400 exemption deduction and $3,000 net capital loss deduction also reduced the amount of the 2008 NOL carryback. As a result, only $1,750 was available to carry to 2009 and later years, as shown on line 10 of his 2008 Form 1045, Schedule B. John enters the $1,750 on line 3 of the worksheet, and $4,750 ($1,750 plus the $3,000 line 2 amount) on line 4. He then subtracts the $4,750 from the $8,150 on line 1 and enters the result, $3,400, on line 5 of the worksheet. He enters a negative $3,400 on Schedule J, line 5. He combines that amount with the $6,000 on Schedule J, line 6, and enters $2,600 on Schedule J, line 7.