When calculating AGI, what type of loss cannot be deducted directly?

When calculating Adjusted Gross Income (AGI), passive losses exceeding passive income cannot be deducted directly. Passive income generally refers to earnings from rental activities or business ventures in which the taxpayer is not actively involved. If passive losses exceed passive income, the losses can be carried over to future tax years to offset future passive income but cannot be used to reduce AGI in the current year. This limitation is established by the passive activity loss rules which intend to prevent taxpayers from using passive losses to offset non-passive income.

In contrast, net capital losses can be deducted up to $3,000 against other income in the current tax year, with any excess being carried forward. Likewise, active business losses can also reduce AGI to the extent that they do not exceed the income from the active business. Long-term losses carried over from previous years can similarly be applied to current-year gains or deducted up to the stipulated limits. Thus, passive losses are treated differently under tax law, reflecting the intention to manage how losses from passive activities impact overall income for tax purposes.