Line 5(p2)

If you used Schedule J to figure your tax for:

• 2007 (that is, you entered the amount from the 2007 Schedule J, line 22, on line 44 of your 2007 Form 1040, on line 41 of your 2007 Form 1040NR, or on Form 1040X for 2007), enter on line 5 the amount from your 2007 Schedule J, line 11.
• 2006 but not 2007, enter on line 5 the amount from your 2006 Schedule J, line 15.
• 2005 but not 2006 or 2007, enter on line 5 the amount from your 2005 Schedule J, line 3.

If you figured your tax for 2005, 2006, and 2007 without using Schedule J, enter on line 5 the taxable income from your 2005 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 2005, 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 2005 for at least 3 years after April 15, 2009 (or the date you file your 2008 tax return, if later).

Any net capital loss deduction on your 2005 Schedule D, line 21, is not allowed for income averaging purposes to the extent it did not reduce your capital loss carryover to 2006. This could happen if the taxable income before subtracting exemptions—shown on your 2005 Form 1040, line 41, or your 2005 Form 1040NR, line 38 (or as previously adjusted)—was less than zero. Enter on line 2 the amount by which your 2005 capital loss carryover to 2006 (the sum of your short- and long-term capital loss carryovers) exceeds the excess of the loss on your 2005 Schedule D, line 16, over the loss on your 2005 Schedule D, line 21. If you had any net operating loss (NOL) carrybacks to 2005, be sure you refigured your 2005 capital loss carryover to 2006.

If you had an NOL for 2005, enter the amount of that NOL from line 25 of the 2005 Form 1045, Schedule A, you filed with Form 1045 or Form 1040X. If you did not have an NOL for 2005, enter the portion, if any, of the NOL carryovers and carrybacks to 2005 that were not used in 2005 and were carried to years after 2005.

John Farmington, who is single, did not use income averaging for 2005, 2006, or 2007. For 2008, John has $18,000 of elected farm income on Schedule J, line 2. The taxable income before subtracting exemptions on his 2005 Form 1040, line 41, is $4,050. A deduction for exemptions of $3,200 is shown on line 42, and line 43, taxable income, is $850. However, John had a $21,750 NOL for 2006, $9,000 of which was remaining to carry to 2005 after the NOL was carried back to 2004. To complete line 1 of the 2005 Taxable Income Worksheet, John combines the $9,000 NOL deduction with the $850 from his 2005 Form 1040, line 43. The result is a negative $8,150, John's 2005 taxable income, which he enters as a positive amount on line 1 of the 2005 Taxable Income Worksheet.

When John filed his 2005 tax return, he had a $3,000 net capital loss deduction on Schedule D, line 21 (which was also entered on Form 1040, line 13), a $7,000 loss on Schedule D, line 16, and a $4,000 capital loss carryover to 2006. However, when John carried back the 2006 NOL ($9,000 of which was carried to 2005), he refigured his 2005 capital loss carryover to 2006 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 2005 that reduced the 2006 NOL carryback. The $3,200 exemption deduction and $3,000 net capital loss deduction also reduced the amount of the 2006 NOL carryback. Therefore, only $1,950 was available to carry to 2007 and later years, as shown on line 10 of his 2006 Form 1045, Schedule B. John enters the $1,950 on line 3 of the worksheet, and $4,950 ($1,950 plus the $3,000 line 2 amount) on line 4. He then subtracts the $4,950 from the $8,150 on line 1 and enters the result, $3,200, on line 5 of the worksheet. He enters a negative $3,200 on Schedule J, line 5. He combines that amount with the $6,000 on Schedule J, line 6, and enters $2,800 on Schedule J, line 7.