ACA1 Task 2 Essay

2092 Words Feb 16th, 2014 9 Pages
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
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Rental activities are also considered passive unless the taxpayer is a real estate professional. Losses from passive activities can only be offset by income from passive activities (IRS Pub 527). In this case, the couple’s rental income of $23,000 completely covers the expenses of$29,200. There is also the $44,000 passive gain for the sale of the rental property. After calculating the basis by taking into account the selling and purchase costs, improvements, accumulated depreciation and rent received for the period, there may be an offset for the $6,200 passive loss of the rental income producing a passive activity gain of $37,800.
A4. Adjustments to Income: Adjusted Gross Income (AGI) is gross income minus certain allowed adjustments. This taxpayer couple is allowed the following adjustments to their income:
$7,200 ($600/month) deduction from income for alimony payments. Taxes due on alimony payments are the responsibility of the recipient and thus can be deducted from the gross income of the payer .
$14,200 for Spouse A’s contributions ($142,000 * 10%) to Keogh retirement plan are deductible. This is a qualified retirement plan that allows deductions of up to 25% of compensation or $51,000 for 2013 .
Self-employed health insurance – One month of Spouse A’s medical premium would qualify as a business expense because the wife’s medical plan was not

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