Tax Return Case Study

Tax Return
Tax Return for Harold and Sarah Petersan

In order to properly prepare a tax return, one must be sure all pertinent documentation is received. In this case study of Harold and Sarah Petersan, we will be working with a variety of forms and applying the appropriate section of the Internal Revenue Service tax code. Harold and Sarah Petersan are a married couple living in California, with one dependant. Both husband and wife work outside the home and the dependant received child care services. During the tax year, 2010, the Petersan’s sold their primary residence for $520,000. A line by line review of the Petersan’s 2010 tax return will show the appropriate treatment of income, deductions, child care expense and the sale of…show more content…
Most of these are “personal living expenses (Cruz, 2011). For example, medical expenses are deductible, to the extent that these expenses exceed 7.5% of income. For the Petersan’s allowable Itemized Deductions on Schedule A are State Income taxes of $2,114 (this includes CA state withholding tax and CA mandatory SDI), Property taxes of $1,500, and Mortgage Interest $14,400. Taxpayers have the option of deducting state income taxes or sales taxes paid. A sales tax table is provided by the IRS to determine a taxpayer’s general sales tax deduction. Or a taxpayer may use actual figures using receipts saved during the tax year. If a big ticket item is purchased during the tax year, it may be more beneficial than the deduction for state income tax. However, for the Petersan’s their state income tax withholding and mandatory state disability withholdings are greater than the allowable sales tax deduction. Total itemized deductions reported on Schedule A are $18,014. Taxpayers have the option of using their itemized deductions or a standard deduction. For 2010 the standard deduction for married filing jointly is $11,400. (Cruz, 2011) Petersan’s will itemize their deductions since they are greater than the allowable standard deduction. This amount from Schedule A are transferred to Form 1040, Line…show more content…
Tax credits are dollar-for-dollar reductions which are subtracted from your tax liability. Tax credits can be more valuable than deductions, although somewhat more difficult to qualify for. (Financial Web). The Petersan’s have several credits to review. They had child care costs for their dependant daughter, Tara. Form 2441, Child and Dependant Care Expenses, is the appropriate form to review and calculate the deduction for the credit available to them. Petersan’s child care costs for 2010 were $10,320. However, the IRS limits the allowable expense for one qualifying child to $3,000 or the income from the lowest wage earner. For the Petersan’s their allowable expense will be $3,000.00 for their one qualifying child, and based on their AGI of $90,916.00, they are limited to a $600.00 ($3,000 x .20) credit. This calculation is made using the table on Form 2441, and then reflected on line 48 of Form 1040. There is one additional credit they will qualify for and that is the Child Tax Credit. This is an up to $1,000 tax credit (reduces tax dollar for dollar) for each qualifying child subject to income limits. The Petersan’s have one qualifying child that meets the IRS criteria for the full $1,000 tax credit. This credit is reflected on Line 51 of Form