Question

David Jacob, a salaried person, incurred a loss of $4,000 from passive activities. This loss can be applied as a deduction to offset taxable income from:

a. his salary.
b. his long-term capital gains for the year.
c. passive activities.
d. any source.

Answer 1

David Jacob can apply his $4,000 loss from passive activities against other passive activity income only, not against his salary, long-term capital gains, or other income sources. If he lacks enough passive income this year, the loss can be carried over to future years.

Step-by-step explanation:

David Jacob, a salaried person, incurred a loss of $4,000 from passive activities. According to the tax laws, passive activity losses can only be applied to offset income from other passive activities. They are not deductible against wages, salaries, or active business income. However, if David has income from other passive activities, he can use his $4,000 loss to offset that income. If he does not have enough passive income in the current year, he can carry over the loss to future years.

It's important to note that specific rules apply, including 'at-risk' rules and 'passive activity loss' rules that can affect how losses are applied. Therefore, David should consult with a tax professional or refer to IRS guidelines for detailed information on how to properly apply his passive activity loss.