Certified Financial Planner (CFP) Tax Planning Practice Exam

The correct understanding of tax implications regarding passive income and passive losses lies in the rules governing how these types of income and losses interact under the tax code. Passive income generally comes from rental activities or businesses in which the taxpayer does not materially participate.

When it comes to offsetting passive income with passive losses, the primary principle is that passive losses can only offset passive income from the same category, which is precisely what is described in the correct answer. This means that, if Jacinto has passive income from a partnership, the passive losses he may have can only be applied against that specific income from the partnership, not from any other income sources he may have.

This aligns with the tax rules that restrict the application of losses, ensuring that one cannot use passive losses to offset non-passive income, thus supporting the position of maintaining a clear delineation between different income types for tax reporting. Therefore, only income generated from the same partnership can be offset by the losses derived from it.

Understanding this concept is crucial for effective tax planning, as it helps in strategizing how to manage income streams and potential losses while remaining compliant with tax regulations.