How are the passive activity rules important in evaluating Other Deductions, Penalties and Loss Disallowance; Tax Credits.

Case Study: Other Deductions, Penalties and Loss Disallowance; Tax Credits— Facts: Brianna, a lawyer, and Oscar, an electrician, are a married couple who live near Asheville, North Carolina. Their total annual AGI was around $425,000 in 2017 (pre-tax reform). They have a 12 year old son and a daughter who is 19 and a full-time college student. While both parents work full-time, they incur expenses equal to about $2,000 per month for after-school childcare. They also pay for their daughter’s tuition and room and board expenses. In 2016, they purchased a second vacation home near the Outer Banks, which they intended to use as a rental property until they were eventually able to retire and live in the home full-time. They also owned two timeshare units, one of which was located in Maui and the other in Denver. Twice every summer, Brianna and Oscar travelled to the Outer Banks home to check on the property. They also paid a company to handle rental of the property throughout the year, although primarily in the prime summer months. Brianna and Oscar also visited the Maui property every other winter for two weeks and the Denver property for one week. On their 2017 tax return, they deducted various maintenance expenses, as well as their travel expenses and the cost of the property management company for their Outer Banks residence. Their 2017 income from rental of the residence was around $21,000. They also deducted the costs associated with their timeshare properties as losses. Brianna, who is 45, and Oscar, who is 47, also heard from a friend that they could reduce their taxable income for 2017 by contributing up to $6,500 to an IRA. Based on that advice, they decided to max out their contributions for a total of $13,000, and deducted that amount on their federal tax return.