Question

3) Given that losses from passive activities can only offset income from passive activities unless the passive activity is sold, what types of activities are not considered to be passive? Name at least three ways (tests) a taxpayer may be treated as an active participant in an activity.

Learning Objective: 07-04 Apply tax-basis, at-risk, and passive activity loss limits to losses from passive investments

4) During all of 2018, Mr. and Mrs. Clay lived with their four children (all are under the age of 17). They provided over one-half of the support for each child. Mr. and Mrs. Clay file jointly for 2018. Neither is blind, and both are under age 65. They reported the following tax-related information for the year: (Use the tax rate schedules)

Salary income	$125,000
Prize from local radio station	1,500
Medical expenses (no health insurance)	4,000
Real estate taxes	4,200
Alimony paid by Mr. Clay (divorced in 2015)	12,000
State income taxes withheld in 2018	1,800
State income taxes paid with 2018 tax return (return was filed in April, 2019)	1,500
Federal income tax withholding	7,500
Qualified home mortgage interest (acquisition debt of $300,000)	15,000
Charitable contributions	4,000

A. What is the Clays' taxes payable or (refund due) (ignore the alternative minimum tax)?

B. What is the Clays' tentative minimum tax and alternative minimum tax?

Learning Objective: 08-05 Explain how to compute a taxpayer's underpayment, late filing, and late payment penalties.

PLEASE SHOW HOW YOU GOT ANSWERS!!!

Answer 1

Answer(3) - If your property loss money is considered as passive activity and losses related are known as passive losses. They are deductible from other passive income during the year.There are exceptions in the rule are

1.Unlimited rental losses for Professionals- Real state Professionals can deduct unlimited rental losses from passive income.

2. Special rental losses Offset - landlords with incomes up to $100,000 to deduct up to $25,000 in losses each year. Losses from passive activities can only offset income from passive activities unless the passive activity is sold.

You can take benefit of tax deductions for passive losses from income only when you sell rental property.

Active and Passive activity- Activity related with the active participants of business are known as active activity. On the other hand, activities relates with material participant is known as passive activities.

Non-passive or active activities

1. Business or investments

2. Salaries

3. Wages

4. dividends and interest

5. Payments from active participants.

6. Stocks, bonds and debentures

7. Sale of properties

8.Partnerships and dependent corporations

9. Royalties

10. trusts related with business.

Passive loss can be limited at risk by deductions- investor can claim for risk deductions in case of investments. The amount at risk can be deducted from tax in case of investments. In this way loss can be limited for passive activity.For example a person invested $25000 in a company, After passing a couple of years the risk on investment is $25000, individual taxation at federal level is 23% and at state level is 8%. Then deductible amount is (23% + 8%)  of 25000 = 5750 + 2000 = 7750. $7750 is deductible amount in case of passive loss at risk.

Ans.(4) (A)- Salary = 125000

Prize from local radio station = 1500

earning = 125000 + 1500 = 126500

Alimony Paid to divorced wife = 12000 (under AGI deduction)

Adjusted Gross Income = 126500 -12000 =114500

Deductions

State income tax = 1800

Real Property tax = 4200

Qualified mortgage interest =15,000

Charitable contributions = 4,000

Total = 1800 + 4200 + 15000 + 4000 = 25000

Taxable Income = Adjusted gross income - taxable expenses

114500 - 25000 = 89500

Tax liability = 8,907 + 22% × (89,500 – 77,400) = 11569

Federal tax withholding = 7500

Net tax liability = tax liability - federal tax withholding

11569 - 7500 = 4069

Child tax credit = 2000 * 4 = 8000 (Four Children)

Tax refund = child tax credit - net tax liability = 8000 - 4069 = 3931

Tax refund = 3931

Answer (4) - B- Tentative minimum tax is $0; Alternative Minimum Tax is $0. Regular tax liability is more than minimum tentative tax liability.