Aca1 Task 2

2361 Words Aug 7th, 2015 10 Pages
ACA1 Tax Treatments for Individual Returns (Task 302.2.3)

A. Recommended Tax Filing Status
From the two filing statuses that the couple can use, the most advantageous for them would be married filing jointly and not married filing separately.

A1. Explain your recommendation based on current, applicable tax laws.
The reason that using the married filing jointly status is more advantageous for the couple is that taxes will be lower than if they filed as married filing separately. Filing jointly provides more tax benefits and the tax rate is generally lower.
They will qualify for five exemptions, one for each of the dependent children, all under the age of 19 and that they provide over half the support for, and one personal
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The couple can exclude the full $296,000 gain since they are filing jointly and per the IRS can exclude up to $500,000.

A2d. Partnership Income and Losses
Partnerships use form 1065 to report income and losses, but taxes are not collected or paid from it, instead, the partners pay the taxes on their own personal tax returns. Each partner is allocated their share of the income/loss according to the partnership agreement. This is done through a schedule K-1. In this case, Spouse A will report $142,000 as income on the couple’s 1040. The couple will not be taxed on the cash withdrawal of $83,500, since partners are not taxed when they receive a withdrawal or distribution, unless it exceeded the partner’s basis.

A2e. Passive Activity Gains and Losses The passive activity rules apply to Individuals, estates, trusts (other than grantor trusts), personal service corporations, and, closely held corporations. (IRS Publication 925) As defined by the IRS, a passive activity is a business activity in which the investor or business owner has the potential to profit but in which the individual does not materially or physically participate. A material participation in a business activity means that the individual participates on a "regular, continuous, and substantial" basis (as defined by the IRS). (Jean Murray, Passive Activity) The couple had two passive activities, both of which we rental activities. Per the IRS, A rental activity is a passive

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