Are you looking to maximize the tax benefits of your passive investments? If so, then you need to know about a crucial change to the passive loss limitation rules that will be coming into effect in 2024.
At Creative Advising, our team of certified public accountants, tax strategists and bookkeepers are keeping a close watch on the tax code adjustments from year to year. We understand that as a savvy investor, you need to stay on top of the latest developments in income tax law so you can maximize your investment returns.
Passive investments have always been a great way to hedge the risks of stock market volatility; however, historically the associated passive losses were limited for the earners of high incomes. The new changes to the passive loss limitations announced by the Internal Revenue Service (IRS) will have a big impact on this sector of investors in 2024.
In this article, we’ll explain the adjustment to the passive loss limitations in 2024 and how to use these tax benefits to your advantage. Whether you’re already an experienced passive investor or new to the field, you’ll want to know the details of this important change so you can make informed decisions when it comes to protecting and growing your investments.
Definition of Passive Loss
Passive loss is a type of investment loss for which the deduction is limited under certain circumstances. It includes losses from rental real estate or partnership activities and applies to both business entities and individual investors. Passive income and losses are based on the amount of money the investor or business puts into the activity without necessarily accounting for the amount of effort or management the investor has over the activity. Generally, in order for an activity to qualify as passive, the investor or business must not materially participate.
Has there been an adjustment to the passive loss limitations in 2024?
At this time, there has been no official adjustment to the passive loss limitations for 2024. Although no changes have been announced, the Tax Cuts and Jobs Act (TCJA) expired in January 2021, and some industry experts expect changes to the Passive Loss Limitations to be enacted sometime in the future. It is important to stay informed of any forthcoming changes and plan accordingly.
Current Limitations on Passive Loss
Currently, passive losses are limited in a number of ways. Taxpayers must first determine if their passive activity is a material participation activity. If it is, then there are no limitations on deductions from the activity other than General Business Credits which are limited. If the activity is not a material participation activity, then passive losses are limited to the excess of passive income over the sum of total non passive income for the tax year. In other words, passive losses cannot be used to offset active income.
In addition, taxpayers may not deduct more than $25,000 in total passive losses each year if their modified adjusted gross income (MAGI) is less than $100,000 ($50,000 if filing separately). Finally, they may not deduct more than the amount of their total passive income.
Has there been an adjustment to the passive loss limitations in 2024?
No, there has not yet been an adjustment to the passive loss limitations that will take effect by 2024. However, this could change over the coming years as Congress re-evaluates the impact of the Expired Tax Cuts and Jobs Act and considers potential adjustments to the existing passive loss limitations. It is important for taxpayers to monitor any proposed changes to the law and discuss their options with knowledgeable advisors.
Impact of the Expired Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) of 2017 implemented significant changes to the U.S. tax code. Among these changes were an increase in the standard deduction and an increase in the pass-through business deduction—both of which had the potential to impact passive loss limitations.
The TCJA increased the deductions allowed for individual taxpayers. This increase, which was famously termed the “standard deduction bump,” allowed taxpayers to deduct an additional $12,000 (or $24,000 for married filing jointly). Furthermore, the TCJA also allowed individuals who own pass-through businesses—such as sole proprietorships and LLCs—to deduct an additional 20% of their net business income from their taxable income. This was seen as a major victory for small business owners.
The impact of the TCJA on passive loss limitations is not clear. The increased standard deduction and business deduction can have the effect of reducing both passive income and passive losses—because the passive losses and income are reduced by the increased deductions on the tax return. This could potentially reduce the overall impact of the passive loss limitations in some cases. However, the TCJA expired at the end of the 2020 tax year, and Congress has not yet reached a consensus about whether to extend the changes.
Has there been an adjustment to the passive loss limitations in 2024? As of now, there has been no indication that an adjustment to the passive loss limitations is planned for 2024. It is possible that the TCJA could be re-instated at some point in the future, but the future of the TCJA is uncertain. Therefore, taxpayers should continue to monitor the situation, and make sure they are aware of any potential changes to the passive loss limitation rules.
Potential Changes to Passive Loss Limitations in 2024
The Tax Cuts and Jobs Act, which expired in 2021, causes potential adjustments to the passive loss limitations taking effect in 2024. Passive losses are losses from activities in which the taxpayer does not materially participate. Usually these passive losses can only be used to offset the income from a passive activity, or be carried over to the following year, unless the taxpayer’s adjusted gross income falls below the specified dollar amount limitation.
However, certain passive losses, such as those from rental activities, are limited on the basis of adjusted gross income. If the taxpayer’s income exceeds the threshold amount that applies to their filing status, the excess passive losses are suspended and can be used only to offset passive income from the same activity in the future.
In 2024, the deduction of up to $25,000 in passive losses, which is allowed for those with an income below a certain threshold, will no longer be available for those who exceed that threshold. Adjustments to the dollar limit and adjusted gross income threshold set by the Tax Cuts and Jobs Act will have a significant impact on individuals with large passive losses and high incomes in 2024.
Individuals should be aware of the potential adjustments to their passive losses limitation in 2024 and can plan accordingly in order to maximize their deductions. Strategies such as deferring gains, losing passive losses, and accelerating income may help individuals minimize the impact of these changes.
Strategies for Mitigating the Effects of Potential Adjustments to Passive Loss Limitations
The potential adjustments to passive loss limitations in 2024 could have a significantly impact on taxpayers and businesses. To mitigate the effects of these potential changes, there are several strategies individuals and entities may consider. These strategies include converting passive losses into deductions, taking advantage of loss limits, and other operational strategies. Conversions of passive losses into deductions may be done via the conversion of active participation or operating activity in a trade or business into active material participation, which is generally more tax-beneficial than passive losses. Similarly, the taking advantage of loss limits involves implementing repayment strategies to ensure that passive losses are not subject to limitation. Lastly, other operational strategies may involve restructuring businesses and activities to reduce the amount of passive losses.
Overall, the adjustment of the passive loss limitation has the potential of impacting individuals and entities significantly. Therefore, it is important to plan accordingly and consider implementing strategies such as conversions of passive losses into deductions, taking advantage of loss limits, and other operational strategies in order to mitigate the negative effects.
“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
Furthermore, due to the dynamic nature of tax-related topics, the information presented in this article may not reflect the most current tax laws, rulings, or interpretations. It is always recommended to verify any tax-related information with official government sources or seek advice from a qualified tax professional before making any decisions or taking action.
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