Question

Hildagard, an architect, earns $415,000 from her practice. She also receives $32,000 in dividends and interest from various portfolio investments. During the year, she pays $100,000 to acquire a 30% interest in a partnership that produces a $560,000 loss for the year. She has $20,000 of passive income from other sources. Compute Hildagard's AGI, assuming that:

a. She does not participate in the operations of the partnership. In this case, Hildagard's AGI is $ _________
b. She is a material participant in the operations of the partnership. In this case, Hildagard's AGI IS $ _________

Answer 1

a) Hildagard's AGI = $415,000 + $32,000 = $447,000

b) Hildagard's AGI = $415,000 + $32,000 - ($560,000 x 30%) + $20,000 = $299,000

Step-by-step explanation:

The maximum deduction for passive losses is $25,000 if your MAGI is lower than $100,000 and then it phases out completely if your MAGI is $150,000 or more.

Since Hildagard's income is much higher than $150,000, then she will not be able to deduct any passive losses (at least not this year). Passive losses will still offset any passive gains though.

If Hildagard materially participated in the partnership, then the losses can be deducted from her AGI.