ACC 4210 Module 4 Itemized Deductions and Passive Losses Assignment Example

The Prices Itemize: A Rental Loss Partly Allowed, a Tax Bill Capped and a Flood That Does Not Count

Student Name

Bachelor of Science in Business Administration, Thomas Edison State University

ACC-4210: Federal Income Taxation

Mentor Name

Month Day, Year

The Prices Itemize: A Rental Loss Partly Allowed, a Tax Bill Capped and a Flood That Does Not Count

Introduction

After gross income and deductions for AGI, a household chooses between the standard deduction and itemizing. Itemized deductions are each limited in their own way, and losses from rental property face separate limits. This assignment applies those rules to the Prices.

Part A: Discussion Questions

1. Why did Congress cap the deduction for state and local taxes at $10,000? Before 2018, the deduction was unlimited and benefited mainly high-income households in states with high income and property taxes, effectively a federal subsidy for state spending. The cap, enacted with a near doubling of the standard deduction, raised revenue and reduced the number of households that itemize. Critics note that it falls hardest on middle-income homeowners in high-tax states such as New Jersey, where property taxes alone often exceed the cap.

2. Why are passive losses limited? Before 1987, investors bought rental properties and limited partnership interests that produced paper losses, often from depreciation, to shelter wages and investment income. The passive activity rules allow passive losses to offset only passive income, carrying unused losses forward until the activity produces income or is sold. An exception lets individuals who actively participate in rental real estate deduct up to $25,000 of losses, phased out as income rises (Young et al., 2024).

Part B: The Wildwood Rental

The Prices own a condo in Wildwood rented to vacationers for 16 weeks a year, which they manage themselves; they used it personally for only a few days. In 2024 the rental produced a net loss of $14,000 after mortgage interest, taxes, repairs and depreciation. Because they actively participate in managing it, up to $25,000 of the loss could offset their other income, but the allowance falls by 50% of modified AGI above $100,000. Modified AGI for this purpose ignores the student loan interest deduction and the passive loss itself, so it is $137,700.

The suspended $7,850 will be deductible in a later year with passive income or lower income, or in full when they sell the condo. Had the Prices hired a management company and made no decisions themselves, they would not meet the active participation test, and none of the loss would be allowed this year. If their modified AGI reaches $150,000 in a later year, the allowance disappears entirely, so the suspended losses would wait for the sale.

Adjusted Gross Income

Itemized Deductions

Itemized deductions of $32,221 exceed the 2024 standard deduction for joint filers, $29,200, so the Prices itemize and save tax on $3,021 of additional deductions. Gruber et al. (2021) found that removing mortgage interest deductibility in Denmark barely changed homeownership, suggesting that deductions like this one mostly reduce the tax of people who would have bought homes anyway.

Taxable Income and Tax

Taxable income is $129,050 minus $32,221, or $96,829. Of that, $1,600 is qualified dividends taxed at a preferential rate. Ordinary income of $95,229 is taxed at 10% on the first $23,200, $2,320; 12% up to $94,300, $8,532; and 22% on the remaining $929, $204; total $11,056. Because ordinary income alone exceeds the $94,050 top of the 0% bracket for qualified dividends, all $1,600 is taxed at 15%, $240. Tax before credits is $11,296; credits follow in the Module 5 assignment. Because the Prices itemized in 2024, any New Jersey income tax refund they receive in 2025 will be taxable to the extent the deduction reduced their federal tax, the tax benefit rule from Module 2 working in reverse. Their marginal rate is 22%, so each additional dollar of mortgage interest saves them 22 cents.

References

Duquette, N. J. (2016). Do tax incentives affect charitable contributions? Evidence from public charities' reported revenues. Journal of Public Economics, 137, 51-69. https://doi.org/10.1016/j.jpubeco.2016.02.002

Gruber, J., Jensen, A., & Kleven, H. (2021). Do people respond to the mortgage interest deduction? Quasi-experimental evidence from Denmark. American Economic Journal: Economic Policy, 13(2), 273-303. https://doi.org/10.1257/pol.20170366

Young, J. C., Nellen, A., Persellin, M. B., Lassar, S. S., Cuccia, A. D., & Cripe, B. M. (2024). South-Western federal taxation: Individual income taxes, 2024 (47th ed.). Cengage Learning.