A taxpayer had the following income and losses for the year: Salary $50,000; Passive Activity Income $10,000; Passive Activity Loss ($15,000); Active Business Loss ($5,000). What is the taxpayer's Adjusted Gross Income (AGI)?

Answer options:

$40,000

$50,000

$45,000

$55,000

How to approach this question

Passive losses only offset passive income. Active losses offset any income.

Full Answer

C.$45,000✓ Correct

Passive activity losses (PALs) can only offset passive activity income. The $15,000 loss offsets the $10,000 income; the remaining $5,000 PAL is suspended. The active business loss of $5,000 is fully deductible against the salary. AGI = $50,000 - $5,000 = $45,000.

Common mistakes

Deducting the excess passive loss against salary.

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