Why can't the IRS make tax filing simpler?

My understanding is that losses from a passive income (rental properties) can NOT be used to lower our active income (full-time jobs) tax liabilities. Yet each time I tell this to someone, they think that this is wrong. Can rental losses be used as an (active) income deduction?
-- Eric J.

This bar bet has to end in a draw. The rules about handling passive and active income are among the most abundant land mines found scattered through the tax code.

Here's what Publication 925, Passive Activity and At-Risk Rules, has to say on the subject of rental income:

“Generally, rental activities are passive activities even if you materially participated in them. However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities.”

But before you decide you're a real estate professional, better check with a tax professional. Like all tax matters, this can have ripple effects on other parts of your return. And no two returns are the same.

For more on the subject, check out the the examples and instructions on how to report passive income elsewhere in Publication 925.

KATRINA RELIEF
I gave nearly $650 to different Katrina relief funds. I have a receipt from Red Cross but the cash I gave to people is not documentable. Can I claim money that is not easily confirmed?
-- Keily S., Lincoln, Neb.

For each contribution of $250 or more to a given charity, you have to get a receipt. You also need to make sure that the recipient is recognized by the IRS as a charitable organization.

For details on what counts as a charity and what doesn’t, check out Publication 526, Charitable Contributions.

    

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