Income tax rules require you to calculate modified adjusted gross income whenever you have a loss from a passive activity. Most passive activities are businesses that you are not involved in operating or rental activity. Tax laws limit the amount of passive activity loss you can deduct on your tax return. Calculation of passive activity loss requires your modified adjusted gross income for the year. Modified adjusted gross income is the adjusted gross income on your tax return without considering any passive activities as well as some types of income and deductions.
1. Locate the line on the first page of your Form 1040 for Adjusted Gross Income (AGI).
2. Add to AGI the amount of any loss from a passive activity. Subtract the amount of any gain from a passive activity.
3. Subtract from AGI any amount of taxable Social Security benefit payments indicated on page 1 of your Form 1040.
4. Remove from AGI the amount on page 1 of your Form 1040 for any deduction of IRA contributions, student loan interest, tuition and fees, adoption expenses, and half of self-employment tax.
5. Increase AGI by any amount on Line 3 of Schedule B in your personal tax return for excludable interest on US savings bonds and by the amount of any loss in Part II of Schedule E for a publicly traded partnership.
- A slightly different calculation of modified adjusted gross income applies for tax rules other than passive activity loss. For example, individuals can only contribute to Roth IRAs when their income doesn’t exceed another formula for modified adjusted gross income.
Items you will need
- Completed Form 1040 personal income tax return
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