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Tax planning ideas for Kevin and Janet: IRS rules

Practically every line of Kevin and Janet's form 1040 can be used for tax planning. They had total income of $98,771 and paid federal income tax of $6,838 or 7%. Additionally, Kevin had income from his business of $48,040 and paid self-employment tax of $7,001 or 15%.

Explain how Kevin and Janet took advantage of existing IRS rules to reduce taxes in the following areas:

capital gains/losses
passive gains/losses
IRA deduction
401K deduction
home ownership
noncash contributions
gambling losses


Solution Preview

The reportable capital loss was allowable in the current year because it did not exceed the $3000 per year limitation. The character of the loss as long term would have been advantageous if there had been other long term capital gains. Of course, the decrease in value of the stock would not have been a deductible loss until sale, and maybe that is the point: that they sold it.

The Aurora property operates at a profit as near as I could tell. The net income in the current year allowed the prior year loss to be offset against the income. Material participation in rental activities would allow for a reportable loss to a maximum of $25,000. To have a loss carrying over for this property, they either did not materially participate or there ...

Solution Summary

The 520 word solution gives a comprehensive discussion of IRS rules as they relate to Kevin and Janet's tax return. The solution gives the rules and explains how they might have done it differently to minimize their income tax bite.