What is the general effect of the at-risk rule on tax benefits?

The at-risk rule primarily limits the amount of losses a taxpayer can claim from passive activities to the extent of their economic investment or "at-risk" amount in those activities. This means that if a taxpayer has invested less money than the total losses generated by the passive activity, they can only deduct losses up to the amount they have actually invested and are at risk of losing. Consequently, this rule effectively reduces the ability to claim passive losses beyond the amount the taxpayer is financially responsible for, which aligns with the conclusion that the correct answer is that it reduces the ability to claim passive losses.

Understanding this rule is crucial for high-income taxpayers who might engage in passive activities, as their potential deductions may be limited. Unlike the suggestion that it increases deductions, the at-risk rule is actually a limitation to ensure that taxpayers can only offset their income with losses proportional to their actual investment risk.