According to the Internal Revenue Service, a taxpayer has the choice between five different filing statues. The five statuses are, Single, Married Filing Separately, Married Filing Jointly, Head of Household, and Qualifying Widow(er) with dependent child. For the couple in question, the recommendation I am making is that they use the filing status of married filing jointly. Since the couple has three children they will qualify for three dependency exemptions as well as two exemptions for themselves. Since all three of the children still live in the household and all of the children are under the age of nineteen the couple is allowed to claim them as dependents. On the other hand, the couple cannot claim spouse B’s mother since they did not supply over fifty percent of the support for her for the year they are filing. The total amount of the mother’s living expense, including the cost of rent, food, and other expenses brings the total support to seven thousand dollars and the mother supplies the couple with $7920 a year. The money that she supplies is what she receives from her Social Security benefits.
The reason that the couple should not file under the status married filing separately is because the tax rates are higher than the tax rates for those filing under the status married filing jointly. Also, there several deductions, credits, and exclusions that are allowed for the status married filing jointly that are not allowed for those that are choosing to file separately. One example, is that the couple would only be able to deduct $250,000 of the income from the sale of the personal residence if they had filed separately, where if they choose to file jointly they will be allowed to excluded the entire amount of income from the sale.
The definition of income, as stated by the Internal Revenue Service, is all income of the taxpayer whether it is taxable or non-taxable. The couple has several items that are considered as taxable income. Those items included, spouse A’s income from the partnership in Fan Company A of $142,000, the $2000 of income from the City Park referee job, the dividends for 2011 that spouse A received from Company E, the income that souse B received form the Controller job of $88,000, and the $5000 loss that spouse B incurred while they were unemployed. The couple also have items that fall under being considered as non-taxable income.
Those items are, the child support that spouse B receives in the amount of $2400 for care of the child, the tax exempt interest payments received from Municipal Bonds in the amount of $900, and the $296,000 of income from the sale of the couple’s personal residence. There is an allowance to taxpayers of $250,000 exclusion on the sale of the taxpayers’ principal residence, and for couples that file under the status married filing jointly, the amount of the exclusion rises to $500,000. A profit on the sale of a capital asset is a capital gain, and a loss on the sale of a capital asset is a capital loss. There are short-term capital gains and losses and there are long-term capital gains and losses. A short-term asset is an asset that has been in the taxpayers’ possession for less than a year, and a long-term asset is an asset that the taxpayer has held for more than a year. Initially it seems that the couple has a long-term capital gain in the amount of $44,000 for the year since they sold a rental property that the couple has held for four years that was purchased for $90,000 and they sold it for $134,000.
The gain would be then added to the couple’s total income for the year. The couple had a short-term capital loss in the amount of $5,000 from the day trading that spouse B was involved while unemployed. The Internal Revenue Service only allows for a $3,000 capital loss per filing year, so the remaining $2,000 will need to be carried forward to the next filing year. The loss would be subtracted from the couple’s total income for the year. If the couple have a gain for one item and a loss for another item, the amounts will offset each other. For example, if the couple has a total of $10,000 in capital gain and a capital loss of $5,000 ($10,000 – $5,000 = $5,000), their income would increase by $5,000. Any of the proceeds that come from the sale of a personal residence will be subject to taxes.
Since there is a rule for a married filing jointly couple, the couple will be able to exclude the entire $296,000 from income. The rule states that a married filing jointly couple are allowed an exclusion up to $500,000 as long as the taxpayer owns the property and has been residing in the residence for a minimum of two of the previous five years prior to selling the residence. Also the exclusion would not be allowed if the couple had sold a residence and used the exclusion in the last two years. On the other hand, when the couple sold the rental property, all of the proceeds from that sale are taxable. If the couple realized a profit from the sale it would be a capital gain and would be added to total income for the year, and the event that they realized a loss it would be deducted from total income for the year.
Since spouse A was in a partnership, a K-1 was issued to the spouse stating that $142,000 was the spouse’s share of the income from the partnership. This amount would be added to the couple’s total income for the year. Spouse A did withdraw an amount totaling $83,500 over the course of the year. The withdraw amount would not be subject to tax since it did not exceed the basis that spouse A had in the partnership. Passive activities are defined as income producing ventures that the owner does not actively participate in. Owning rental properties are also considered a passive activity. The couple did have some items that would be considered to be passive activities.
The couple had two rental properties that they owned which brought in total of $23,000 in rents and had a total of $29,200 in associated expenses and depreciation. The couple would recognize a passive loss for this income of $6,200, ($23,000 – $29,200 = -$6,200). The couple also had a passive gain of $44,000 when they sold a third rental property. The impact these items have on the couple’s income would be a total of $37,800 in passive gain. The $44,000 gain from the sale of the third rental property minus the loss of $6,200 on the other two rental properties, ($44,000 – $6,200).
A $44,000 passive gain on the sale of a rental property, which could be offset when the adjusted cost basis is figured for the property. This basis will take into account purchase costs, selling costs, improvements, rent received in this period, and accumulated depreciation. The adjustments to income that I would include on the couple’s return would be the alimony that was paid to spouse A’s ex-wife, the contributions that were made to the Keogh retirement plan, a portion of the self-employment tax, a possible deduction for paid health insurance, and possible deduction for their dependent in college. The alimony qualifies as an adjustment because a deduction is allowed for the person paying the alimony. The contributions made to the Keogh retirement plan also meet the rules set by the Internal Revenue Service for deductibility.
The amount contributed falls under the maximum allowed and therefore are deductible. The tax code allows for a partner to deduct a portion of the self-employment tax, such tax would have been paid on spouse A’s income from the partnership and the couple would be allowed a deduction. The health insurance that spouse A has through the partnership may qualify for a self-employed health insurance deduction. The cost of tuition and fees that the couple paid on behalf of their dependent that is attending college might be deductible if the couple’s AGI falls under the maximum allowed income of $160,000. My recommendation is for the couple to take the standard deduction, opposed to itemizing. The standard deductions will offer more than itemizing. Itemizing would require the couple to have expenses that exceed 7.5% of their adjusted gross income, and with the items that would be allowed for deductions, that amount would not be reached.
The couple would receive a larger tax break by taking the standard deductions. The deductions that the couple would not be able to claim are the mileage that spouse B incurred commuting to and from work or the amount spent on business suits because the mileage was not part of actually performing work tasks and the suits would be able to deemed as normal wear and could be worn for activities other than work. The deductions that the couple could claim if they itemized are any medical expenses that exceed 7.5% of the couple’s AGI and the charitable contributions that the couple made during the year that totaled $6,000.
The credits that the couple would be able to claim would be the Child Tax Credit, the American Opportunity Tax Credit, and the Saver’s Credit. The Child Tax Credit is a credit of $1,000 for each qualifying child, which would give the couple a total of $2,000 as long as the couple’s AGI is not above $110,000, if their AGI is above that amount the credit is reduced. The American Opportunity Tax Credit allows a credit of up to $2,500 for qualifying expenses of a college student, which is applied to couples that have an AGI up to $160,000. The Saver’s Credit allows for a credit up to $2,000 for jointly filing taxpayers that have made contributions to a qualifying retirement plan.