Question

Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Janine, Michael, and Candice). The couple received salary income of $100,000 and qualified business income of $10,000 from an investment in a partnership, and they sold their home this year. They initially purchased the home three years ago for $200,000 and they sold it for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions, and they had $3,550 withheld from their paychecks for federal taxes. They are also allowed to claim a child tax credit for each of their children. However, because Candice is 18 years of age, the Jacksons may only claim the child tax credit for other qualifying dependents for Candice. (Use the tax rate schedules.)

Assume the original facts but now suppose the Jacksons also incurred a loss of $5,000 on the sale of some of their investment assets. What effect does the $5,000 loss have on their taxable income?

Decrease in taxable income to how much?

Answer 1

Ans. Taxable income is reduced by $ 3000 on Line 6 of form 1040

Capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For reporting of any capital gain or losses Form 8949 is used, and the final net number from that form is then transposed to Schedule D and then to the 1040. If your losses exceed your gains, you can deduct the difference on your tax return, up to $3,000 per year ($1,500 for those married filing separately) but they are not considered a regular itemized deduction. If your net loss is greater than the maximum allowed amount, you can carry the excess amount over to future tax years.

Income from sale of house:- As the question mentioned that the Jacksons bought the house 3 Years Ago and sold the house for $250,000 by which they made a gain on sale of property of $ 50,000. Hence Under IRC section 121, which mentions that, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale. However, the ownership and occupancy need not be concurrent. The law permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers). Therefore they do not need to disclose the gain on sale of property in their form 1040 as it is the gain on the sale qualified for the exclusion from the sale of a principal residence.

Child Tax Credit: As the question mentions that the Jacksons have four kids and candice is above 17 years of age hence the couple can only get child tax credit of $2,000 per child who are below 17 years of age hence $6,000 is the child tax Credit for the couple.

Qualified business income: the couple made a profit of $ 10,000 as qualified business income.Hence deduction for qualified business income in form 1040 will be $2,000 (20% of Profits). The information has to be filled in Schedule LINE 9 (QBID) which will be then transposed in Line 9 in form 1040.