Module 4:Loss Limitations for Individuals

Question 1

Characterizations of Income

Answer 1

1. Ordinary: salaries and wages, state and local tax refunds, alimony, IRA and pension income, prizes, social security, taxable scholarships, gambling, unemployment compensation, self-employment income
2. Portfolio: What would earn on a portfolio of assets “aka stocks and dividends”
3. Passive: Income you get but don’t actively participate in (rental income), active is like working in a business
   Ex: Passive income when renting, capital income when selling that rental property.
   rule: Only passive loss offset passive income, losses are carried forward indefinitely for rentals
   Ex: Trusts and investments in companies are passive
4. Capital: Sales of capital assets “any property personal or business” to create gains and losses.

Question 2

Factors Limiting Losses

Answer 2

1. Tax basis: Investment in asset adjusted for items like income and debt, if limitations to tax basis, then tax is carried forward until taxpayer has more basis to absorb loss
2. At-risk basis “partnerships”: If have enough basis to absorb loss, still cant be greater than at-risk amount which is economic risk of the activity. If don’t have enough at risk basis then carried forward until have enough or sold. When sold can use the accelerated
3. Passive loss limitations “rental”: Can only be deducted to extent of gains. Carried forward forever
   -Exemptions: Mom and pop rule, where a person manages property and therefore is active, not passive. Can deduct up to $25,000, but reduced by 50% over excess of $100k and phased out at 150K.
   Ex: If make $110k, 5k is taken from $25k potential. So can deduct $20k of losses.
   -Real estate: Because person is active not passive
4. Capital Loss limitations: For individuals, can deduct up to $3,000 for capital losses. This included joint, so if file separate then $1500 each. Carried forward forever.
   Note: Worthless stock and securities & personal bad debt are considered capital losses