Since Harold and Sarah are married and filing jointly and they also have credits and Itemized Deductions, I used form 1040 to complete their tax return. I was a little confused when it came to filling out the W-2 information. I wasn’t sure were the information for the 401(k) contributions and Healthcare cost (payroll deductions) should go at first. I soon realized that the information for the 401k contributions belonged in box 12 on the W-2 and the information for the Healthcare cost belonged in box 14. I also had to put in the information for the SDI (mandatory disability insurance) in box 14. For the past two years I have filed my own taxes but I have never had to work with SDI before. What made this even more confusing is the fact that the state of California treats SDI as state income tax (Cruz p 5-12). After filling out the W-2 forms for both Harold and Sarah I ended up with a combined income of $90,916 on line 7 of the 1040 form.
Next I tried to figure out the income they may have received from selling their home since there was not a 1099-S form available. I knew that according to the IRS guidelines that if you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases). Also, if you can exclude all of the gain, you do not need to report the sale on your tax return. The calculations were:
Adjusted basis of the home $520,000
Gain (or loss) on the sale $ 220,000 = ($520,000 sale price - $300,000 cost basis)
Gain that you can exclude $ 250,000
Gain realized ($220,000 - $250,000= -$30,000) Therefore this is not taxable and it does not have to be reported.
My next step was to figure out the credits and deductions. Since the deductions are itemized I was require to fill out a Schedule A. The Schedule A‘s Itemized Deductions are then recorded on line 40a of the Form1040. Their allowable Itemized Deductions on Schedule A were: