In 2009, around 2.5 million people filed tax returns with an adjusted gross income of zero or a negative AGI. For people other than business owners, this means no tax is due during the current year, but the "loss" does not affect other tax years. For business owners, the negative AGI may mean losses can be carried back or forward to reduce tax bills in other years.
Definitions
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There are three income figures that are relevant for tax purposes. Gross income is the actual amount of income a person received such as salary. For business owners, it includes profits rather than revenues. Adjusted gross income is gross income minus anything on a specific IRS list, detailed on lines 23 through 35 of the Form 1040 tax return; examples include health savings account payments and student loan interest. Taxable income is adjusted gross income minus allowable deductions: these can be itemized expenses or standard amounts based on the taxpayer's circumstances.
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Negative AGI Is Possible
It is very rare that a person would have a negative AGI, but it is possible. It would generally only happen if a person was on an extremely low income; for example, only receiving unemployment benefits but still paying sums that lower AGI, such as tuition fees or health insurance as a self-employed person. It can also happen if a business owner has made a loss.
Employees and Unemployed People
If you are not running a business, having a negative AGI does not have any bearing on past or future tax returns. It does mean that there will be no federal income tax payable for the year as a negative AGI guarantees that the taxable income will be negative. However, this "negative" income cannot be factored into the next year's tax filing and calculation.
Businesses
If you are running a business as a sole proprietor, and losses on the business have contributed to your negative AGI, and thus in turn a negative taxable income, you may be able to apply some of these losses to different tax years. Generally you must first apply the losses to the income from the past two years to see if you become eligible for refunds, and then apply remaining losses to future tax years.
To use this facility, you must complete IRS Form 1045. This involves recalculating the figures for the year in a way that means some of the costs that turn gross income into AGI are either excluded from the calculation, or subject to limits. You then recalculate your allowable deductions, which may be affected by the revised AGI, and then calculate a revised taxable income figure. If this figure is still negative, it forms the "loss" that you can apply to previous or future tax years.