What does "carryforward" mean in tax terms?

In tax terms, "carryforward" refers to the process of applying a tax deduction or credit that was not fully utilized in the current tax year to future tax years. This mechanism allows taxpayers to take advantage of available deductions or credits that exceed the limits set for one year, thereby reducing taxable income in subsequent years when they may have a higher tax liability.

For example, if a taxpayer has a net operating loss in one year, they may choose to carry that loss forward to offset taxable income in future years. This can provide significant tax relief when the taxpayer's income increases, allowing them to lower their tax burden strategically over a longer period.

In contrast, the other options describe different tax practices or concepts that do not accurately reflect the definition of "carryforward." The method of reducing taxable income in the current year relates more to current year deductions rather than future application. Auditing previous tax returns is a compliance measure, and deferring tax payments indefinitely does not align with the concept of carrying forward deductions or credits which must eventually be utilized in a limited timeframe as defined by tax law.