The Internal Revenue Service is once again allowing a one-time opportunity to examine and modify your grouping elections. This has happened a few times now, but this time there is a compelling reason. One of the new tax laws is a 3.8% tax on investment income which also applies to passive income. One of the key ways to manage your passive income is through grouping elections. So now taxpayers have a motivation to avoid passive income, where in the past it was often times advantageous to be generating passive income.

This one-time opportunity is available either in 2013 or 2014, but it is the 2013 tax filing season so people should definitely take a look at it now. The active and passive rules are very complicated and nuanced, but at a basic level you need to prove you spent enough hours in an activity in order to call it active. Sometimes people have five different activities which are all related and overlapping, but it’s pretty hard to get enough hours if you are counting up the five activities separately so a grouping election would allow you to add up your hours from the five activities and if it met the active standard, then all five would be deemed active. Seems pretty slick, but keep in mind these rules are very complicated in how many hours you need, which types of activities can be grouped together and for each taxpayer the motivations for grouping or not can be different. Once made, the election is permanent unless the economic situation changes and the grouping is no longer appropriate – or until the IRS changes the active passive rules again and allows everybody another one-time regrouping opportunity.

In accordance with Circular 230 Disclosure