ACA1 Task 2 Essays

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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…show more content…
A2c. Profit or Loss from the Sale of Property: The taxpayer couple sold personal and rental property for this tax period. Both sales have potential gains. However, the gain from the sale of the personal residence qualifies for exclusion up to $500,000 under Section 121 as they lived in and used the residence at least two of the five years prior to the sale. The gain or loss is calculated as the sale price less selling costs and adjusted basis of the property. Proceeds from the sale of the rental property are taxable because it is an income producing property and would be considered normal income. However, Section 1231 designates that exchanges of business property held longer than one year may be considered a long-term capital gain if there is a gain realized and any loss would be considered an ordinary loss. Any depreciation taken in past tax years will need to be recaptured in the tax year of the sale. A2d. Partnership Income and Losses: Income and loss from a partnership is business income. The loss or income for the business is reported to the IRS on form 1065 but the partnership does not pay taxes on the income. Instead, the profits or losses are passed through to the individual partners on Schedule K-1 and they account for the taxes on their individual tax returns. Spouse A’s $142,000 from Schedule K-1 will be reported as income on their 1040 tax return. The $85,000 in withdrawals from the business will not be

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