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Tax Table

Tax table Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. Tax table Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Tax table For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. Tax table Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. Tax table See Passive Activity Deductions, later. Tax table Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Tax table However, there is a special allowance under which some or all of your passive activity loss may be allowed. Tax table See Special $25,000 allowance , later. Tax table Definition of passive activity loss. Tax table    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Tax table See Passive Activity Income and Deductions , later. Tax table   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. Tax table For details on net active income, see the Instructions for Form 8810. Tax table For the definition of passive activity gross income, see Passive Activity Income , later. Tax table For the definition of passive activity deductions, see Passive Activity Deductions , later. Tax table Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. Tax table Allocation of disallowed passive activity loss among activities. Tax table   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. Tax table The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. Tax table Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Tax table Loss from an activity. Tax table   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. Tax table   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. Tax table See Significant Participation Passive Activities , later. Tax table Example. Tax table John Pine holds interests in three passive activities, A, B, and C. Tax table The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. Tax table Therefore, a ratable portion of the losses from activities A and B is disallowed. Tax table He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. Tax table   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. Tax table The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. Tax table Excluded deductions. Tax table    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. Tax table See Recharacterization of Passive Income , later. Tax table Separately identified deductions. Tax table   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. Tax table   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Tax table   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Tax table Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Tax table See Active participation , later. Tax table Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Tax table See Active participation , later. Tax table Losses from sales or exchanges of capital assets. Tax table Section 1231 losses. Tax table See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Tax table Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. Tax table The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. Tax table For more information, see Regulations section 1. Tax table 469-1(f)(4). Tax table Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Tax table The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. Tax table Credits that are included in figuring the general business credit are subject to the passive activity rules. Tax table See the Instructions for Form 8582-CR for more information. Tax table Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). Tax table You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Tax table You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Tax table Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Tax table This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Tax table For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. Tax table Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. Tax table These rules do not apply to C corporations. Tax table For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Tax table Passive Activities There are two kinds of passive activities. Tax table Trade or business activities in which you do not materially participate during the year. Tax table Rental activities, even if you do materially participate in them, unless you are a real estate professional. Tax table Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Tax table Treatment of former passive activities. Tax table   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. Tax table You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. Tax table Treat any remaining prior year unallowed loss like you treat any other passive loss. Tax table   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Tax table The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. Tax table You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). Tax table Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). Tax table A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. Tax table You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Tax table Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. Tax table See Real Estate Professional under Activities That Are Not Passive Activities, later. Tax table An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. Tax table It does not matter whether the use is under a lease, a service contract, or some other arrangement. Tax table Exceptions. Tax table   Your activity is not a rental activity if any of the following apply. Tax table The average period of customer use of the property is 7 days or less. Tax table You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. Tax table If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Tax table The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. Tax table The activity's average period of customer use will equal the sum of the amounts for each class. Tax table The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Tax table Significant personal services include only services performed by individuals. Tax table To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Tax table Significant personal services do not include the following. Tax table Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. Tax table You provide extraordinary personal services in making the rental property available for customer use. Tax table Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. Tax table The rental is incidental to a nonrental activity. Tax table The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. Tax table The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Tax table The rental of property is incidental to a trade or business activity if all of the following apply. Tax table You own an interest in the trade or business activity during the year. Tax table The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. Tax table Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Tax table Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. Tax table You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Tax table You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. Tax table    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. Tax table Special $25,000 allowance. Tax table   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. Tax table This special allowance is an exception to the general rule disallowing the passive activity loss. Tax table Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Tax table   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. Tax table If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. Tax table   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Tax table See Phaseout rule , later. Tax table Example. Tax table Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. Tax table She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Tax table She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). Tax table Commercial revitalization deduction (CRD). Tax table   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Tax table Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. Tax table You cannot claim a CRD for a building placed in service after December 31, 2009. Tax table Active participation. Tax table   Active participation is not the same as material participation (defined later). Tax table Active participation is a less stringent standard than material participation. Tax table For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Tax table Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Tax table   Only individuals can actively participate in rental real estate activities. Tax table However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. Tax table   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. Tax table The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. Tax table   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Tax table   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Tax table   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. Tax table   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Tax table Example. Tax table Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. Tax table He advertised and rented the house to the current tenant himself. Tax table He also collected the rents and did the repairs or hired someone to do them. Tax table Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. Tax table Phaseout rule. Tax table   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). Tax table If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. Tax table    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Tax table Taxable social security and tier 1 railroad retirement benefits. Tax table Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Tax table The exclusion from income of interest from qualified U. Tax table S. Tax table savings bonds used to pay qualified higher education expenses. Tax table The exclusion from income of amounts received from an employer's adoption assistance program. Tax table Passive activity income or loss included on Form 8582. Tax table Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). Tax table Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Tax table The deduction for the employer-equivalent portion of self-employment tax. Tax table The deduction for domestic production activities. Tax table The deduction allowed for interest on student loans. Tax table The deduction for qualified tuition and related expenses. Tax table Example. Tax table During 2013, John was unmarried and was not a real estate professional. Tax table For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Tax table His modified adjusted gross income is $120,000. Tax table When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Tax table He must carry over the remaining $16,000 passive activity loss to 2014. Tax table He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. Tax table   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Tax table For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). Tax table   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Tax table Ordering rules. Tax table   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. Tax table The portion of passive activity losses not attributable to the CRD. Tax table The portion of passive activity losses attributable to the CRD. Tax table The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Tax table The portion of passive activity credits attributable to the rehabilitation credit. Tax table The portion of passive activity credits attributable to the low-income housing credit. Tax table Activities That Are Not Passive Activities The following are not passive activities. Tax table Trade or business activities in which you materially participated for the tax year. Tax table A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). Tax table It does not matter whether you materially participated in the activity for the tax year. Tax table However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. Tax table  See Temporary Regulations section 1. Tax table 469-1T(e)(4)(ii). Tax table The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. Tax table An activity of trading personal property for the account of those who own interests in the activity. Tax table See Temporary Regulations section 1. Tax table 469-1T(e)(6). Tax table Rental real estate activities in which you materially participated as a real estate professional. Tax table See Real Estate Professional , later. Tax table You should not enter income and losses from these activities on Form 8582. Tax table Instead, enter them on the forms or schedules you would normally use. Tax table Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Tax table Material participation tests. Tax table    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Tax table You participated in the activity for more than 500 hours. Tax table Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. Tax table You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. Tax table The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Tax table A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. Tax table See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Tax table You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Tax table The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Tax table An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. Tax table Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Tax table   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Tax table Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). Tax table Participation. Tax table   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Tax table Work not usually performed by owners. Tax table   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. Tax table The work is not work that is customarily done by the owner of that type of activity. Tax table One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. Tax table Participation as an investor. Tax table   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Tax table Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. Tax table Spouse's participation. Tax table   Your participation in an activity includes your spouse's participation. Tax table This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. Tax table Proof of participation. Tax table You can use any reasonable method to prove your participation in an activity for the year. Tax table You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Tax table For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. Tax table Limited partners. Tax table   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Tax table However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. Tax table   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). Tax table Retired or disabled farmer and surviving spouse of a farmer. Tax table   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Tax table Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. Tax table Corporations. Tax table   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. Tax table   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. Tax table See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Tax table Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Tax table However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Tax table For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. Tax table See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Tax table If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). Tax table If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. Tax table Qualifications. Tax table   You qualified as a real estate professional for the year if you met both of the following requirements. Tax table More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. Tax table You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Tax table   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. Tax table You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. Tax table   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Tax table However, you can count your spouse's participation in an activity in determining if you materially participated. Tax table Real property trades or businesses. Tax table   A real property trade or business is a trade or business that does any of the following with real property. Tax table Develops or redevelops it. Tax table Constructs or reconstructs it. Tax table Acquires it. Tax table Converts it. Tax table Rents or leases it. Tax table Operates or manages it. Tax table Brokers it. Tax table Closely held corporations. Tax table   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. Tax table Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. Tax table Self-charged interest. Tax table   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. Tax table   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. Tax table This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Tax table   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. Tax table    Exception. Tax table The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. Tax table 469-7(g) to avoid the application of these rules. Tax table For more details on the self-charged interest rules, see Regulations section 1. Tax table 469-7. Tax table Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. Tax table Passive activity income does not include the following items. Tax table Income from an activity that is not a passive activity. Tax table These activities are discussed under Activities That Are Not Passive Activities , earlier. Tax table Portfolio income. Tax table This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Tax table It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Tax table The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Tax table For more information on self-charged interest, see Self-charged interest , earlier. Tax table Personal service income. Tax table This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. Tax table Income from positive section 481 adjustments allocated to activities other than passive activities. Tax table (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Tax table ) Income or gain from investments of working capital. Tax table Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. Tax table This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. Tax table Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. Tax table Any other income that must be treated as nonpassive income. Tax table See Recharacterization of Passive Income , later. Tax table Overall gain from any interest in a publicly traded partnership. Tax table See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Tax table State, local, and foreign income tax refunds. Tax table Income from a covenant not to compete. Tax table Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. Tax table Alaska Permanent Fund dividends. Tax table Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. Tax table See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Tax table Disposition of property interests. Tax table   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. Tax table The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. Tax table An exception to this general rule may apply if you previously used the property in a different activity. Tax table Exception for more than one use in the preceding 12 months. Tax table   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Tax table Any gain allocated to a passive activity is passive activity income. Tax table   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. Tax table Exception for substantially appreciated property. Tax table   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. Tax table You used the property in a passive activity for 20% of the time you held your interest in the property. Tax table You used the property in a passive activity for the entire 24-month period before its disposition. Tax table If neither condition applies, the gain is not passive activity income. Tax table However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. Tax table   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. Tax table Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Tax table   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. Tax table Disposition of property converted to inventory. Tax table   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Tax table Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. Tax table This rule applies only if you meet all of the following conditions. Tax table At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). Tax table Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. Tax table You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. Tax table Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. Tax table For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. Tax table See Coordination with other limitations on deductions that apply before the passive activity rules , later. Tax table Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. Tax table Exceptions. Tax table   Passive activity deductions do not include the following items. Tax table Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Tax table Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Tax table For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Tax table Losses from dispositions of property that produce portfolio income or property held for investment. Tax table State, local, and foreign income taxes. Tax table Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Tax table Charitable contribution deductions. Tax table Net operating loss deductions. Tax table Percentage depletion carryovers for oil and gas wells. Tax table Capital loss carrybacks and carryovers. Tax table Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Tax table See Coordination with other limitations on deductions that apply before the passive activity rules , later. Tax table Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Tax table Net negative section 481 adjustments allocated to activities other than passive activities. Tax table (Section 481 adjustments are adjustments required due to changes in accounting methods. Tax table ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Tax table The deduction for the employer-equivalent portion of self-employment tax. Tax table Coordination with other limitations on deductions that apply before the passive activity rules. Tax table   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. Tax table The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. Tax table Proration of deductions disallowed under basis limitations. Tax table   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. Tax table For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. Tax table   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. Tax table For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. Tax table Proration of deductions disallowed under at-risk limitation. Tax table   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. Tax table For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. Tax table Coordination of basis and at-risk limitations. Tax table   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. Tax table Separately identified items of deduction and loss. Tax table   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. Tax table   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. Tax table See Grouping Your Activities , later. Tax table Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). Tax table See Section 1231 Gains and Losses in Publication 544 for more information. Tax table Are attributable to pre-enactment interests in activities. Tax table See Regulations section 1. Tax table 469-11T(c). Tax table Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. Tax table Grouping is important for a number of reasons. Tax table If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Tax table But if the two activities are separate, you must show material participation in each one. Tax table On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. Tax table But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. Tax table Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Tax table Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Tax table You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Tax table The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Tax table All of the factors do not have to apply to treat more than one activity as a single activity. Tax table The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. Tax table Example 1. Tax table John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Tax table Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Tax table For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. Tax table Example 2. Tax table Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Tax table Betty is also a partner in DEF (a trucking business). Tax table ABC and DEF are under common control. Tax table The main part of DEF's business is transporting goods for ABC. Tax table DEF is the only trucking business in which Betty is involved. Tax table Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Tax table Consistency and disclosure requirement. Tax table   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Tax table You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. Tax table   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. Tax table   See Disclosure Requirement , later. Tax table Regrouping by the IRS. Tax table   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. Tax table Rental activities. Tax table   In general, you cannot group a rental activity with a trade or business activity. Tax table However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. Tax table Example. Tax table Herbert and Wilma are married and file a joint return. Tax table Healthy Food, an S corporation, is a grocery store business. Tax table Herbert is Healthy Food's only shareholder. Tax table Plum Tower, an S corporation, owns and rents out the building. Tax table Wilma is Plum Tower's only shareholder. Tax table Plum Tower rents part of its building to Healthy Food. Tax table Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Tax table Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Tax table The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Tax table If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. Tax table Grouping of real and personal property rentals. Tax table   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. Tax table However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. Tax table Certain activities may not be grouped. Tax table   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. Tax table Holding, producing, or distributing motion picture films or video tapes. Tax table Farming. Tax table Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Tax table For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Tax table Exploring for, or exploiting, oil and gas resources. Tax table Exploring for, or exploiting, geothermal deposits. Tax table   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. Tax table Limited entrepreneur. Tax table   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. Tax table Activities conducted through another entity. Tax table   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Tax table Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. Tax table    You may not treat activities grouped together by the entity as separate activities. Tax table Personal service and closely held corporations. Tax table   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. Tax table See Material Participation , earlier, and Significant Participation Passive Activities , later. Tax table Publicly traded partnership (PTP). Tax table   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Tax table Partial dispositions. Tax table   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Tax table However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. Tax table Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Tax table You are required to report certain changes to your groupings that occur during the tax year to the IRS. Tax table If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Tax table You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. Tax table If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Tax table New grouping. Tax table   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. Tax table The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Tax table In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Tax table Addition to an existing grouping. Tax table   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. Tax table The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. Tax table In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Tax table Regrouping. Tax table   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Tax table The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Tax table If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Tax table In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Tax table Groupings by partnerships and S corporations. Tax table   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Tax table Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Tax table S. Tax table Return of Partnership Income, or Form 1120S, U. Tax table S. Tax table Income Tax Return for an S Corporation, whichever is applicable. Tax table   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. Tax table   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Tax table Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Tax table Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. Tax table If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. Tax table If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). Tax table If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. Tax table Instead, enter income or losses on the form and schedules you normally use. Tax table However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. Tax table Limit on recharacterized passive income. Tax table   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. Tax table Investment income and investment expense. Tax table   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. Tax table Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. Tax table If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. Tax table Corporations. Tax table   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. Tax table The corporation is not treated as materially participating in the activity for the year. Tax table One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. Tax table Worksheet A. Tax table   Complete Worksheet A. Tax table Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Tax table Begin by entering the name of each activity in the left column. Tax table Column (a). Tax table   Enter the number of hours you participated in each activity and total the column. Tax table   If the total is more than 500, do not complete Worksheet A or B. Tax table None of the activities are passive activities because you satisfy test 4 for material participation. Tax table (See Material participation tests , earlier. Tax table ) Report all the income and losses from these activities on the forms and schedules you normally use. Tax table Do not include the income and losses on Form 8582. Tax table Column (b). Tax table   Enter the net loss, if any, from the activity. Tax table Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). Tax table Enter -0- here if the prior year unallowed loss is the same as the current year net income. Tax table Column (c). Tax table   Enter net income (if any) from the activity. Tax table Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Tax table Column (d). Tax table   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). Tax table If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Tax table Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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Investigate Before You Invest

What do you want to invest in: stocks, bonds, mutual funds? Do you want to open an IRA or buy an annuity? Does your employer offer a 401K? Remember, every investment involves some degree of risk. Most securities are not insured by the Federal government if they lose money or fail, even if you purchase them through a bank or credit union that offers Federally insured savings accounts. Make sure you have answers to all of these questions before you invest:

  • Define your goals. Ask yourself "Why am I investing money?" Maybe you want to save money to purchase a house or to save for retirement. Maybe you would like to have money to pay for your child's education, or just to have a financial cushion to handle unexpected expenses or a loss of income.
  • How quickly can you get your money back? Stocks, bonds, and shares in mutual funds can usually be sold at any time, but there is no guarantee you will get back all the money you paid for them. Other investments, such as limited partnerships, often restrict your ability to cash out your holdings.
  • What can you expect to earn on your money? While bonds generally promise a fixed return, earnings on most other securities go up and down with market changes. Also, keep in mind that just because an investment has done well in the past, there is no guarantee it will do well in the future.
  • What type of earnings can you expect? Will you get income in the form of interest, dividends or rent? Some investments, such as stocks and real estate, have the potential for earnings and growth in value. What is the potential for earnings over time?
  • How much risk is involved? With any investment, there is always the risk that you won't get your money back or the earnings promised. There is usually a trade-off between risk and reward: the higher the potential return, the greater the risk. The federal government insures bank savings accounts and backs up U.S. Treasury securities (including savings bonds). Other investment options are not protected.
  • Are your investments diversified? Some investments perform better than others in certain situations. For example, when interest rates go up, bond prices tend to go down. One industry may struggle while another prospers. Putting your money in a variety of investment options can help to reduce your risk.
  • Are there any tax advantages to a particular investment? U.S. Savings Bonds are exempt from state and local taxes. Municipal bonds are exempt from federal income tax and, sometimes, state income tax as well. For special goals, such as paying for college and retirement, tax-deferred investments are available that let you postpone or even eliminate payment of income taxes.

Compare Investment Vehicles

Not all investment vehicles are created equal or work for your personal financial goals. Some provide steady income and are low risk, but yield small returns on investment; others may provide significant returns, but require a long term investment commitment. There is a wide assortment of investment vehicles available. Some of the most popular include: mutual funds, traditional IRAs, Roth IRAs, savings bonds or bond funds, stocks, and certificates of deposit.

Some investments pay out earnings on a regular (quarterly, monthly, or annual) basis, while others pay out earnings at the end of the investment period or may have age requirements for when you can withdraw your money without a penalty. Make sure your investment income stream matches your investment timeline.

You should also consider the tax ramifications. If you are saving for retirement or for education, consider investments that offer incentives for saving for a particular purpose. Your contributions for some investments are tax deductible, but the earnings are not taxed (e.g. Roth IRA); your contributions to other investments may not be taxed, but the earnings are taxed (e.g. traditional IRA).

You don't have to put all of your money in one investment. Consider diversifying your investment portfolio by placing your money in several investment vehicles. This can protect you from risk; while one of your investments may be performing poorly, another one of your investments can make up for those losses.

Type of Investment What is it? Risk level
Traditional IRA Traditional IRA is a personal savings plan that gives tax advantages for savings for retirement. Investments may include variety of securities. Contributions may be tax-deductible; earnings are not taxed until distributed. Risk levels vary according to the holdings in the IRA
Roth IRA A personal savings plan where earnings that remain in the account are not taxed. Investments may include a variety of securities. Contributions are not tax-deductible. Risk levels vary according to the holding in the IRA
Money Market Funds Mutual funds that invest in short-term bonds. Usually pays better interest rates than a savings account but not as much as a certificate of deposit (CD). Low risk.
Bonds and Bond Funds Also known as fixed-income securities because the income they pay is fixed when the bond is sold. Bonds and bond funds invest in corporate or government debt obligations. Low risk.
Index Funds Invest in a particular market index. An index fund is passively managed and simply mirrors the performance of the designated stock or bond index. Risk level depends on which index the fund uses. A bond index fund involves a lower risk level than an index fund of emerging markets overseas.
Stocks Stocks represent a share of a company As the company's value rises or falls, so does the value of the stock. Medium to high risk.
Mutual funds Invest in a variety of securities, which may include stocks, bonds, and/or money market securities. Costs and objectives vary. Risk levels vary according to the holdings in the mutual fund.

Investing Through Your Employer

Many employers encourage their employees to save for their retirement by establishing 401(k), 403(b), or 457(b) plans. Employees that participate in these programs elect to have a set amount of their income deducted from their paychecks to save for retirement; these amounts are not subject to income taxes. In many cases, your employer will match a portion of the amount of the money that you contribute into your 401(k) account, which is like getting "free" money. If you stop working at a company, remember to take the money from your 401(k) with you. If you "rollover" the total from your old job to an account at your new job, a traditional IRA, you will not have to pay taxes on the money.

The Tax Table

Tax table Publication 505 - Introductory Material Table of Contents IntroductionNonresident aliens. Tax table Ordering forms and publications. Tax table Tax questions. Tax table What's New for 2014 Reminders Introduction The federal income tax is a pay-as-you-go tax. Tax table You must pay the tax as you earn or receive income during the year. Tax table There are two ways to pay as you go. Tax table Withholding. Tax table If you are an employee, your employer probably withholds income tax from your pay. Tax table In addition, tax may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. Tax table The amount withheld is paid to the Internal Revenue Service (IRS) in your name. Tax table Estimated tax. Tax table If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Tax table People who are in business for themselves generally will have to pay their tax this way. Tax table You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rents, and royalties. Tax table Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. Tax table This publication explains both of these methods. Tax table It also explains how to take credit on your return for the tax that was withheld and for your estimated tax payments. Tax table If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Tax table Generally, the IRS can figure this penalty for you. Tax table This underpayment penalty, and the exceptions to it, are discussed in chapter 4. Tax table Nonresident aliens. Tax table    Before completing Form W-4, nonresident alien employees should see the Instructions for Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Tax table Also see chapter 8 of Publication 519, U. Tax table S. Tax table Tax Guide for Aliens, for important information on withholding. Tax table What's new for 2013 and 2014. Tax table   See What's New for 2014 in this Introduction, and What's New for 2013 in chapter 4. Tax table Comments and suggestions. Tax table   We welcome your comments about this publication and your suggestions for future editions. Tax table   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Tax table NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Tax table Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Tax table   You can send your comments from www. Tax table irs. Tax table gov/formspubs/. Tax table Click on “More Information” and then on Give us feedback on forms and publications. Tax table   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Tax table Ordering forms and publications. Tax table   Visit www. Tax table irs. Tax table gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 business days after your request is received. Tax table Internal Revenue Service 1201 N. Tax table Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Tax table   If you have a tax question, check the information available on IRS. Tax table gov or call 1-800-829-1040. Tax table We cannot answer tax questions sent to either of the above addresses. Tax table What's New for 2014 Use your 2013 tax return as a guide in figuring your 2014 estimated tax, but be sure to consider the following. Tax table Standard mileage rates. Tax table  The 2014 rate for business use of your vehicle is 56 cents per mile. Tax table The rate for use of your vehicle to get medical care or move is 23½ cents per mile. Tax table The rate of 14 cents per mile for charitable use is unchanged. Tax table Personal exemption increased for certain taxpayers. Tax table  For 2014, the personal exemption amount is increased to $3,950 for taxpayers with adjusted gross income at or below $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, or $152,525 if married filing separately. Tax table The personal exemption amount for taxpayers with adjusted gross income above these thresholds may be reduced. Tax table Limitation on itemized deductions. Tax table  For 2014, itemized deductions for taxpayers with adjusted gross income above $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, and $152,525 if married filing separately may be reduced. Tax table Health care coverage. Tax table  When you file your 2014 tax return in 2015, you will need to either (1) indicate on your return that you and your family had health care coverage throughout 2014, (2) claim an exemption from the health care coverage requirement for some or all of 2014, or (3) make a payment if you do not have coverage or an exemption(s) for all 12 months of 2014. Tax table For examples on how this payment works, go to www. Tax table IRS. Tax table gov/aca and click under the “Individuals & Families” section. Tax table You may want to consider this when figuring your “Other taxes” on Line 12 of the 2014 Estimated Tax Worksheet (Worksheet 2-1). Tax table For general information on these requirements, go to www. Tax table IRS. Tax table gov/aca. Tax table Advance payments of the Premium Tax Credit. Tax table  If you buy health care insurance through the Health Insurance Marketplace, you may be eligible for advance payments of the Premium Tax Credit to help pay for your insurance coverage. Tax table Receiving too little or too much in advance will affect your refund or balance due. Tax table Promptly report changes in your income or family size to your Marketplace. Tax table You may want to consider this when figuring your estimated taxes for 2014. Tax table For more information, go to www. Tax table IRS. Tax table gov/aca and see Publication 5120 and Publication 5121. Tax table http://www. Tax table IRS. Tax table gov/pub5120 Alternative minimum tax (AMT) exemption amount increased. Tax table  The AMT exemption amount is increased to $52,800 ($82,100 if married filing jointly or qualifying widow(er); $41,050 if married filing separately). Tax table Lifetime learning credit income limits. Tax table  In order to claim a lifetime learning credit, your MAGI must be less than $54,000 ($108,000 if married filing jointly). Tax table Retirement savings contribution credit income limits increased. Tax table  In order to claim this credit for 2014, your MAGI must be less than $30,000 ($60,000 if married filing jointly; $45,000 if head of household). Tax table Adoption credit or exclusion. Tax table  The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $13,190. Tax table In order to claim either the credit or exclusion, your MAGI must be less than $237,880. Tax table Earned income credit (EIC). Tax table  You may be able to take the EIC in 2014 if: Three or more children lived with you and you earned less than $46,997 ($52,427 if married filing jointly), Two children lived with you and you earned less than $43,756 ($49,186 if married filing jointly), One child lived with you and you earned less than $38,511 ($43,941 if married filing jointly), or A child did not live with you and you earned less than $14,590 ($20,020 if married filing jointly). Tax table Also, the maximum MAGI you can have and still get the credit has increased. Tax table You may be able to take the credit if your MAGI is less than the amount in the above list that applies to you. Tax table The maximum investment income you can have and get the credit has increased to $3,350. Tax table Reminders Future developments. Tax table  The IRS has created a page on IRS. Tax table gov for information about Publication 505 at www. Tax table irs. Tax table gov/pub505. Tax table Information about any future developments affecting Publication 505 (such as legislation enacted after we release it) will be posted on that page. Tax table Social security tax. Tax table   Generally, each employer for whom you work during the tax year must withhold social security tax up to the annual limit. Tax table The annual limit is $117,000 in 2014. Tax table Photographs of missing children. Tax table  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Tax table Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. Tax table You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Tax table Additional Medicare Tax. Tax table  Beginning in 2013, a 0. Tax table 9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. Tax table You may need to include this amount when figuring your estimated tax. Tax table See the instructions for line 12 of the 2014 Estimated Tax Worksheet. Tax table You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4, Employee's Withholding Allowance Certificate. Tax table For more information on Additional Medicare Tax, go to IRS. Tax table gov and enter “Additional Medicare Tax” in the search box. Tax table Net Investment Income Tax. Tax table  Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). Tax table NIIT is a 3. Tax table 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. Tax table NIIT may need to be included when figuring estimated tax. Tax table See the instructions for line 12 of the 2014 Estimated Tax Worksheet. Tax table You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4. Tax table For more information on NIIT, go to IRS. Tax table gov and enter “Net Investment Income Tax” in the search box. Tax table Prev  Up  Next   Home   More Online Publications