A. Recommended Tax Filing Status
The tax filing status that I would recommend is Married Filing Joint. The reason for this is that the IRS has various tax breaks for married persons that file together that are unavailable if you file married filing separate. It also affect the tax rate, they will pay a lower rate of taxes if they file together than they would if they filed separately.
A2a. Taxable and Non-Taxable Income
Taxable Income for the couple would include the following items: Spouse A’s income from the partnership, Spouse A’s income from the part time job, Spouse B’s income from the electronics firm, and the dividends that were received by Spouse A from Company E.
Their Non-Taxable Income items would be: The child support that spouse B receives (child support is nontaxable because it was taxed as income on the parent that is paying it), the interest received on Municipal Bonds (municipal bonds are tax exempt), and the income on the sale of their personal residence is tax exempt because it was their primary residence and they lived there for the required amount of time for the exemption of 500,000 (since they are joint filers).
A2b. Capital Gains and Losses
The couple has 5,000 in short term capital losses from the day trading while spouse B was unemployed. These losses can be netted against any capital gains that may exist. For example if the sale of the rental property resulted in a long term capital gain, however the rental property is a passive activity so the short term loss can only be claimed for 3,000 and the remaining amount would be carried forward.
A2c. Profit or Losses from Sale of Property
The profit from sale of the couple’s personal residence would not be taxed. Their personal residence was lived in for at least 2 of the last 5 years and was under the cut off of the exemption of 500,000 after their adjusted basis calculation was deducted from their sale price.
The profit from the sale of the rental property would be taxed as mention in the paragraph above. Depending on how the adjusted basis came out it would either be an ordinary loss or a capital gain.
A2d. Partnership Income and Losses
Spouse A received a K-1 reporting the share of the partnership income as 142,000. This amount will be reported by the couple on their schedule 1040 as income. The cash withdrawal of 83,500 would most likely not be considered a gain (the determining factor for this is whether or not the amount of Spouse A’s interest in the partnership is higher or lower than the withdrawal amount.)
A2e. / A3. Passive Activity Gains and Losses
The couple has passive activity from the rental properties that they own but are managed by a local realty company, which means they are not actively participating. Their gross rents are 23,000 and their expenses/depreciation total 29,200. The result of this activity is a passive loss of $6,200.00 The couple also has the gain on the sale of the rental property that could be passive because again it is from their rental properties that they do not actively participate in. The maximum amount of loss they could claim from rental properties is 25,000 per the IRS regulations.
A4. Adjustments to Income (on the 1040 form this area is called Adjusted Gross Income)
There are multiple adjustments and deductions available to the couple in the 1040 AGI section. The alimony that Spouse A pays can be listed in this section as an adjustment, this will lower their income. Because alimony paid is a deduction to the payer. Alternatively the child support amount that they have listed will not affect anything; you do not need to include it in your income so it is not an adjustment to income. Spouse A’s health insurance would qualify them for a self-employed health insurance deduction.
The contributions to Spouse A’s Keogh plan are also an adjustment to income, this is because they can be deducted in the year they are contributed so that the contributions to the plan are “tax free”. However, I am unsure about the calculation of maximum because the IRS states that: “Retirement plans for self-employed people were formerly referred to as “Keogh plans” after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.” (“Retirement Plans for Self-Employed People”, 2014)
The moving expenses are not an adjustment to Income, the reason for this is that on form 3903 there is a distance test worksheet, when the calculation is done it shows the move was not a difference of 50 or more miles since the move was 52 miles minus the distance to her previous job of 3 miles it is only 49. This does not qualify them to deduct their expenses.
The itemized deductions that the couple would be allowed to take are a deduction for their medical expenses in the amount of expenses that exceeds 10% of their Adjusted Gross Income (line 38 on 1040). So they would take their 10% of their AGI and subtract that number from their total medical expenses and the remaining amount is the available deduction. I don’t believe this would result in much of a deduction if any in their situation.
The 6,000 in charitable contributions would be an itemized deduction. However, the 2,600 in business suits is not a valid deduction because you can wear a business suit as everyday clothing. If the clothing were a uniform or something more specifically required by the job that she would not be able to wear in place of her everyday clothes then the amount would be deductible.
Due to these calculations, I would recommend to the couple that they take the standard deduction of 12,200 because I believe this would be higher than their total for itemized deductions.
A6. Tax credits
Because the couple has a dependent that is in college and living at home they may be eligible to take the American opportunity credit or the lifetime learning credit these credits are available to someone that pays college expenses for themselves or a dependent. They cannot take both however, only one education credit is allowed per year so they would want to calculate which is more beneficial.
The couple has dependent children, so they might also be able to take a child tax credit of up to 1,000 per child however, their adjusted gross income may be too high which would phase the credit out to 0. Without doing all of the calculations I am not certain as to whether or not they would actually get this credit.
It is also possible that they would qualify for a savers credit which is based upon contributions to a qualifying retirement plan, but again I am not sure if they would end up being over the adjusted gross income limit to receive this credit.
Partner’s Instructions for Schedule K-1 (Form 1065) (2013 ). (n.d.). Partner’s Instructions for Schedule K-1 (Form 1065) (2013 ). Retrieved March 10, 2014, from http://www.irs.gov/instructions/i1065sk1/ch02.html Publication 523 (2013), Selling Your Home. (n.d.). Publication 523 (2013), Selling Your Home. Retrieved March 10, 2014, from http://www.irs.gov/publications/p523/ar02.html Publication 544 (2013), Sales and Other Dispositions of Assets. (n.d.). Publication 544 (2013), Sales and Other Dispositions of Assets. Retrieved March 10, 2014, from http://www.irs.gov/publications/p544/index.html Ten Facts about Capital Gains and Losses. (n.d.). Ten Facts about Capital Gains and Losses. Retrieved March 10, 2014, from http://www.irs.gov/uac/Newsroom/Ten-Facts-about-Capital-Gains-and-Losses1
1040 Central. (n.d.). 1040 Central. Retrieved March 13, 2014, from http://www.irs.gov/Individuals/1040-Central Retirement Plans for Self-Employed People. (n.d.). Retirement Plans for Self-Employed People. Retrieved March 13, 2014, from http://www.irs.gov/Retirement-Plans/Retirement-Plans-for-Self-Employed-People