In order to properly prepare a tax return, there should be a complete list of the correct documentation in order to facilitate In this case Harold and Sarah Petersan; the forms will be a varied depending on their information. Harold and Sarah Petersan is a married couple living in California, with one dependant. Both husband and wife work outside the home and the dependant received child care services. During the tax year, 2010, the Petersan’s sold their primary residence for $520,000.A line by line review of the Petersan’s tax return will show the appropriate treatment of income, deductions, child care expense and the sale of a primary residence.
The first step is to determine the taxpayers filing status and then which is the appropriate form to use in the preparation of the tax return. According to the Internal Revenue Service, the filing status used is that which is determining on the last day of the tax year. (Internal Revenue Service, 2012)The Petersan’s filing status will be married filing jointly and because they have a dependent child with child care expenses and they sold their primary residence, they will need to file a 1040 form, a form 2441, a Schedule A for itemization of their deductions.
Their daughter does meet all five of the tests in order to qualify as a dependent child. These tests are the relationship test in which she is their daughter or step-daughter or adopted daughter, the age test because she is under 19, the residency test because she lives with her parents all year and the support test because she did not contribute 50% or more of her own support. (Cruz, 2012)So they are able to claim credit for child care expenses and they are entitled to a child tax credit. Of the child care cost of $10, 320, the Petersan’s are only allowed to claim a certain percentage based on their adjusted gross income. This credit is calculated as a percentage of employment related expense paid during the year (Cruz, 2012). The Petersan’s have an AGI that is over $43, 0001 so they care only able to claim 20% and on their form 2441 the actual deduction is $1,000.
Homeowners who sell their primary residence do not pay taxes on the appreciation in the home up to $500,000 for married couples. (Internal Revenue Service, 2012) When they bought the house they paid $300,000. They sold their house for $520,000. In the equation where the sold price is subtracted from the original cost, the difference is $220,000 and there for does not exceed the threshold of $500,000. The Petersan’s will not have to pay taxes on this appreciation.
Taxes on the property should be deducted based according to the number of days in the year that the buyer and seller both owned the property. In this instance that data is not available and so the Petersan’s get the full $14,400 paid on the property in that year. This information is figured out on a Schedule D home sale worksheet.
With their adjusted AGI exceeding $57,500 the Petersan’s cannot file a form 8880 for their retirement savings contributions, but they are also allowed to contribute up to $5,000 each to their retirement savings.
The Petersan’s are a married couple with one dependent child with qualifying child care expenses who sold their primary residence with a gain of $220,000; they also both contributed to their retirement savings over the course of the year. They are both able to contribute up to $5,000 each. They filed a 1040 with a Schedule A for real estate’s taxes, also a form 2441 for child care expenses and a 1099-s for home mortgage interest paid.
Courtney from Study Moose
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