Active Income

7. Differentiate between the following: active income, passive income, and portfolio income.

Active income is earned income like salaries and wages from a job performed. Passive income is income from an investment or trade. Rental income can be a form of passive income if the person receiving the income is not active in the day-to-day duties of it. Portfolio income is income from dividends, stocks, or interest income.

13. Briefly, what is "material participation"? Why is the determination of whether a taxpayer materially participates important?

Material participation requires a taxpayer to be involved in the operations of the activity on a regular, continuous, and substantial basis. (Smith 7-9) It is substantial, continuous and regular and passes one of the seven tests. It is important because it determines whether income is active or passive. Depending upon how it is classified, active or passive, states how and if losses may be deducted.

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 2012, she incurred a loss, for tax purposes, of $30,000 on the office building. How must Mary Beth treat this loss on her 2012 tax return?

On her 2012 tax return, she can deduct this passive loss against other passive income on a Schedule E. She can’t use it to lower taxable income. She will have to carry the loss forward.

34. Mike and Sally Card file a joint return for the 2012 tax year. Their adjusted gross income is $65,000 and they incur the following interest expenses:

Investment income and related expenses amount to $7,000 and $500, respectively. What