Acct553 Essay

528 WordsAug 7, 20123 Pages
7-7 Differentiate between the following: active income, passive income, and portfolio income. Active income – income with is related to efforts directly by the taxpayer. This could include salary, commissions, wages, etc (page 7-6 text). Passive income – income which is received from passive activities Portfolio income – income coming from interest, dividends, annuities, and royalties The difference between the three classifications is important because there are different rules for passive activities. 7-13 Briefly, what is “material participation”? Why is the determination of whether a taxpayer materially participates important? 7-46 Mary Beth is a CPA, devoting 3,000 hours per year to her practice. She also owns an office building in which she rents out space to tenants. She devotes none of her time to the management of the office building. She has a property management firm make all management decisions for her. During 2011, she incurred a loss, for tax purposes, of $30,000 on the office building. How must Mary Beth treat this loss on her 2011 tax return? The general rule is that losses arising from a passive activity are not deductible, except against income from a passive activity. The unused portion of the loss, however, is not lost but is suspended until offset by passive income in a future tax year or until the entire activity is disposed of in a fully taxable transaction (page 7-4 of text). This means that Mary Beth cannot take a deduction for the $30,000 loss this year. She will need to wait until the property earns some income. 8-34 Mike and Sally Card file a joint return for the 2011 tax year. Their adjusted gross income is $65,000 and they incur the following interest expenses: Qualified education loans $3,500 Personal loan 1,000 Home mortgage loan 4,000 Loan used to purchase . . . 15,000 Investment income and related

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