Ch.8 Comp Problem Reba Dixon is a fifth-grade school teacher who earned a salary of $37,680 in 2023. She is 45 years old and receives $1,200 of alimony payments each month from her former husband (divorced in 2016). Reba also rents out a small apartment building. This year Reba received $51,600 of rental payments from tenants, and she incurred $19,500 of expenses associated with the rental. Reba and her daughter Heather (20 years old at the end of the year) moved to Georgia in January of this year. Reba provides more than one-half of Heather's support. They had been living in Colorado for the past 15 years, but ever since her divorce, Reba has been wanting to move back to Georgia to be closer to her family. Luckily, last December, a teaching position opened up and Reba and Heather decided to make the move. Reba paid a moving company $2,170 to move their personal belongings, and she and Heather spent two days driving the 1,520 miles to Georgia. Reba rented a home in Georgia. Heather decided to continue living at home with her mom, but she started attending school full time in January and throughout the rest of the year at a nearby university. She was awarded a $3,240 partial tuition scholarship this year, and Reba helped out by paying the remaining $500 tuition cost. If possible, Reba thought it would be best to claim the education credit for these expenses. Reba wasn't sure if she would have enough items to help her benefit from itemizing on her tax return. However, she kept track of several expenses this year that she thought might qualify if she was able to itemize. Reba paid $6,280 in state income taxes and $13,540 in charitable contributions during the year. She also paid the following medical-related expenses for herself and Heather: Insurance premiums $ 8,600 Medical care expenses $ 1100 Prescription medicine $430 Nonprescription medicine $100 New contact lenses for Heather $ 200 Shortly after the move, Reba got distracted while driving and ran into a street sign. The accident caused $980 in damage to the car and gave her whiplash. Because the repairs were less than her insurance deductible, she paid the entire cost of the repairs. Reba wasn't able to work for two months after the accident. Fortunately, she received $2,000 from her disability insurance. Her employer, the Central Georgia School District, paid 60 percent of the premiums on the policy as a nontaxable fringe benefit, and Reba paid the remaining 40 percent portion. A few years ago, Reba acquired several investments with her portion of the divorce settlement. This year she reported the following income from her investments: $2,200 of interest income from corporate bonds and $1,660 interest income from City of Denver municipal bonds. Overall, Reba's stock portfolio appreciated by $12,990, but she did not sell any of her stocks. Heather reported $6,300 of interest income from corporate bonds she received as gifts from her father over the last several years. This was Heather's only source of income for the year. Reba had $10,830 of federal income taxes withheld by her employer. Heather made $1,080 of estimated tax payments during the year. Reba did not make any estimated payments. Description Amount Gross Income: 37,680 @ 14,400 @ 51,600 & 1,200 @ 2,200 @ 0@ 107,080 & Salary Alimony received Rental receipts Disability insurance payments Interest income from corporate bonds Interest income from municipal bonds PP | P | AR AR R | R (1) Gross income Deductions for AGlI: Expenses for rental property (2) Total for AGI deductions (3YAGI Alimony received: $1,200 per month x 12 months = $14,400 &+ 19,500 & 19,500 & 87 580 M &+ P Disability insurance payments: $800 of $2,000 (40%) of payment excluded because taxpayer paid 40% of premium on insurance policy = $1,200 Medical expenses: $10,330 - $6,568 [7.5% x $87,580] = $3,762 Tax on taxable income: See head of household tax rate schedule; $6,868 + $913 [22% x ($63,998 — $59,850)] = $7,781 Credits: American Opportunity Tax Credit of $120 for $500 tuition paid on Heather's behalf and $500 child tax credit (see Note D) Note A. The moving expenses and repair costs from her accident are nondeductible. Note B. Medical expenses: All of the medical expenses qualify for the deduction except the nonprescription medicine. Note C. The first question we have to answer to determine Reba's filing status is whether she can claim Heather as a dependent. If so, she may qualify for head of household filing status. If not, she will file a single taxpayer. Does Heather qualify as Reba's dependent? Yes, as analyzed below. Test Is Heather a qualifying child of Reba? Relationship Yes, daughter Age Yes, under age 24 and a full- time student (and younger than Reba). Residence Yes, Heather had the same principal residence as Reba for the entire year. Support Yes. Heather did not provide more than half of her own support. Her scholarship does not count as support she provided for herself because she is Reba's child. Note D: Reba may claim a $500 child tax credit for Heather because Heather is a qualifying dependent (but not a qualified child who is under age 17). Because Reba's AGI ($87,580) is in the phase-out range for the American Opportunity Tax Credit (i.e., between $80,000 — $90,000), she may not take the full $500 AOTC credit. Instead, she is limited to a $120 credit (($500 qualified expenses x [1 - (($87,580 AGI — $80,000 Phase-out threshold) + $10,000 phase-out range)]) = ($500 x [1 — 0.76]) = $120). Note that 40% of the AOTC is refundable ($120 x 0.40 = $48) and appears on line 29 of page 2, Form 1040; the remaining $72 ($120 — $48 = $72) is nonrefundable and appears on line 20 of page 2, Form 1040 via Schedule 3, Form 1040.
