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Federal Tax: Types and Benefits and Intricacies of Rules

Discussion questions for federal income tax:

Types and Benefits

John and Jill, who are married, reported 2012 itemized deductions of $7,500 and $500 respectively. John suggests that they file their Federal income tax returns separately-he will itemize his deductions from AGI, and she will claim the standard deduction. Explain why John suggested the taxes be prepared in such a way. What should the couple do? What is the best option? What are some tax planning considerations for John and Jill in future years?

Intricacies of Rules

Tax rules are often very precise. For instance, a taxpayer must ordinarily provide "over 50%" of another person's support in order to claim a dependency exemption. Why is the threshold "over 50%" as opposed to "50% or more"? Explain in detail.

Please provide references.

Solution Preview

Explain why John suggested the taxes be prepared in such a way. What should the couple do? What is the best option? What are some tax planning considerations for John and Jill in future years?

What John has suggested is not an allowable filing status for Jill. The rule is that when a married couple each file separately, they must both use the same filing status with respect to itemizing vs. the standard deduction. If John itemizes his deductions, then Jill must also. She cannot take advantage of the standard deduction unless she also files separately.

For tax year 2012, the standard deduction for MFJ (married filing joint) is $11900. The standard deduction for MFS (married filing separately) is half of that for each, or $5950. Because their total deductions amount to less than the standard deduction, there should be no question that they should both take the allowable standard deduction. In this case and for deductions only, it won't matter whether they file jointly or separately.

The following four scenarios are possible for John and Jill:

1. MFJ with itemized deductions of $8,000
2. MJF using the standard deduction of $11,900
3. MFS with itemized deductions of $7500 + 500 = $8000
4. MFS with the standard deduction of $5950 + 5950 = $11,900

It will be easier to file a joint return using #2 above, and the tax brackets will tend to favor a joint filing. That cannot be demonstrated in this problem without more information. There could be certain extenuating circumstances for which separate filings might prove beneficial or even necessary. One common reason relates to heavy medical expenses for one spouse where a separate filing might produce a larger deduction. Not so in our case, but it does happen. ...

Solution Summary

The 1089 word solution including references explains both the theory and the practical application of tax law for the two situations.

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