1. In your “own” words, please describe what a “Suspended Loss” is, how it is generated and when it is becomes deductible. (5 pts) A suspended loss is a capital loss that is suspended until future years because it exceeds passive income limitations for the current year. They are generated if a loss occurs for an activity one year, the loss exceeds passive income limitations and cannot be claimed in that year, the taxpayer continues the activity the following year(s). They are deductible when there is sufficient passive income.
2. Please describe “Active Participation” as it relates to a taxpayer’s involvement in an investment in Real Estate. (5 pts). An active participant is one that may not be regular, continuous or substantial. They make some managerial decisions and must hold an interest of 10% or more in the property at all times during the year. These participants may deduct up to a $25,000 loss for non-passive income.
3. Macy had a lot of medical expenses this year that were not covered by her insurance (either due to a deductible, co-insurance, or co-pay). Her un-reimbursed qualifying medical expenses total $8,356 and her AGI for 2013 is $45,000. Assuming she will itemize on her 2013 tax return, how much of her medical expenses will she be able to deduct? (5 pts) Medical Expenses $8,356
Less 10% of $45,000 (AGI) 4,500
Total Medical Expense Deduction $3,856
4. Heather & Terry have a mortgage on their primary residence of $750,000 and a mortgage on their vacation home of $410,000. In 2013, they incurred $46,400 of mortgage interest expense. How much, if any, of that interest is deductible on Schedule A? (5 pts)
The IRS has taken the position that if the initial mortgage exceeds $1,000,000, up to $100,000 of the excess will qualify as home equity interest. Rev. Rul. 2010-25 Combined Mortgage $ 1,160,000
Mortgage Interest Expense 46,400
Allowable Indebtedness 1,100,000
Allowable Deduction $ 44,000