A consultant has the following income items:
Self Employment Income: $55,000
Rental Income: $30,000
Dividend Income: $4,500
Long-Term Capital Gain: $3,600
Short Term Capital Loss: $2,200
What should the consultant report as passive income?
a. $30,000
b. $31,400
c. $35,900
d. $34,500
Answer: A. $30,000
Explanation: The rental income is the only one of the choices that qualify as passive income. Passive income, as defined by the IRS, includes income from rental activities, limited partnerships, and other activities in which the taxpayer does not materially participate.
The other items/choices are as follows:
Self Employment Income: Earned Income Dividend Income: Investment Income Long-Term Capital Gain: Investment Income Short-Term Capital Loss: Investment Loss
One important thing to note is that in order to qualify as passive income, the taxpayer must not materially participate in the activity that generated the income. It's income that requires little to no effort from the taxpayer to earn, which means that the taxpayer cannot be involved in the day-to-day management or operations of the activity. Therefore, the consultant should report $30,000 as passive income, which is the rental income amount.
Answer: a
A. $30,000
Income earned from rentals can be considered passive income if the person is not actively managing the property. As for capital gains and dividends, the IRS does not consider these items to be passive income. Therefore, the consultant would only report $30,000 earned from Rental Income as passive income.