ACA1 Task 2
A. Filing Status: There are two choices of filing status available to this taxpayer couple, married filing separately and married filing jointly. For this taxpayer couple the recommended filing status is married filing jointly. The tax rates would be higher if they filed separately. Additionally, some deductions (e.g. tuition and student loan interest), credits (e.g. Earned Income Credit) and exclusions would not be allowed if they filed separately. Since they sold a personal residence during this tax year, they will be able to exclude up to $500,000 profit from the sales as joint filers rather than only up to $250,000 if filing separately. There will be 2 qualified personal exemptions and 3 exemptions for the 3 dependent children. All the children qualify as dependents because they are all under age 19 and the parents provide over half or all of their support . Spouse B’s mother cannot be claimed as a dependent because she provided for over half of her own support with contributions of $7,920 while her family calculates their contributions for her support to be $7,000. A2a. Taxable and Non-Taxable Income: The IRS defines taxpayer income as all income, both taxable and non-taxable. Items that are considered taxable income for this couple are: $142,000 for Spouse A from K-1 partnership income (business or self-employed income). $2,000 Spouse A wages income from city park job.
$88,000 Spouse B wages income from electronics firm.
Total of Spouse A’s dividends from Company E qualifies as dividends for capital gains rate. Stock bought 11 years ago satisfies the holding period requirement of IRS. ($5,000) loss on day trading by Spouse B classified business activity . Items considered to be non-taxable for this couple are:
$900 municipal bond interest ($5,000 at 9% semi-annual payments) is exempt per Section 103. $2,400 Spouse B Child Support received is considered to be for child care and is not taxable (IRS Publication 525). $296,000 ($430,000 sale - $100,000 basis - $34,000 improvements) income on the sale of their personal residence. Section 121 allows married joint filers to exclude up to $500,000 gains on the sale of a personal residence. Spouse A withdrew $83,500 from the partnership which Section 706 treats as recovery of capital. Therefore the withdrawals are not taxable income, only the partner’s share of profit or loss as reported on form 1065 and passed through to the Spouse A on the K-1 is taxable. Healthcare premiums paid by the employer are not included in taxable gross income for the employee .
A2b. Capital Gains and Losses: Capital gains and losses apply to assets. Capital gains occur when the sale or trade of the asset results in a profit. Capital losses occur when an asset is sold or traded at a loss. Capital gains and losses can be either short-term (assets held less than one year) or long-term (assets held longer than one year) The short and long term designations are important because long term capital gains generally enjoy a lower tax rate while short term gains are taxed at the ordinary income tax rate (IRS Pub 550). Short and long term assets are netted against each other (i.e. short/short and long/long). If the final sum of short-term and long-term assets is opposite signs, then the results will be netted between against each other. There was a $5,000 capital loss for Spouse B from day trading. Only $3,000 is allowed by the IRS per year so the additional $2,000 will need to be carried forward to the next year. However, this couple has a gain of $44,000 gain from the sale of a rental house. The gain will need to be calculated to take into account any selling costs, repairs, accumulated depreciation and so on. If there is a gain after calculating the adjusted basis it is a capital gain and can be netted against the short term loss. If the capital losses exceed the capital gains the long term loss is netted up with the short term day trading loss and up...
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IRS Publication 550
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Publication 501 Test to be a Qualifying Child
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Tax Topics 429
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