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Part 1
Determine the net income tax payable or refund due for Ms B for 2018.
Part 1
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Explanation of Solution
Determine the net income tax payable or refund due for Ms B for 2018.
Calculation of Income Tax Payable (or Refund Due) | |||
Description | Amount ($) | Amount ($) | |
Gross Income: | |||
Salary | $65,000 | ||
Interest and Dividend Income | |||
Interest on Savings | $1,300 | ||
Interest from AS Bank | 400 | ||
Dividends on B Stock | 800 | ||
Dividends on G Stock | 750 | ||
Dividends on O Stock | 650 | 3,900 | |
State income tax refund | 1,100 | ||
Business Income | 19,800 | Refer Note 1 | |
Net Short-Term | 1,200 | Refer Note 2 | |
Gross Income | 91,000 | ||
Less: ‘For AGI Deduction’ | |||
Business expenses | (16,750) | Refer Note 3 | |
Self-employment tax deduction | (216) | Refer Note 4 | |
Adjusted Gross Income (AGI) | 74,034 | ||
Less: ‘From AGI Deduction’ | |||
Itemized deductions ($9,645) or standard deduction ($12,000), whichever is greater | (12,000) | Refer Note 5 | |
Deductions for qualified business income | (567) | Refer Note 6 | |
Taxable Income | $61,467 | ||
Tax Liability | $9,308 | Refer Note 7 | |
Self-employment Tax | 431 | Refer Note 4 | |
Total Tax Liability | $9,739 | ||
Less: Tax withholdings by employer | (10,500) | ||
Estimated taxes | (1,000) | ||
Net tax payable (or refund due) for 2018 | $(1,761) |
Note (1): Compute business income amount.
Details | Amount ($) |
Revenue from part-time tax practice | $3,800 |
Royalties received for software program | 16,000 |
Total business income | $19,800 |
Note (2): Compute short-term capital gain (STCG).
Step 1: Compute cost of short-term capital investment as at purchase date.
Security | Number of Shares | Cost Price | = | Cost of Investment | |
Corporation G | 500 shares | $17.60 | = | $8,800 | |
Sports Utility Vehicle | 6,000 | ||||
Corporation B | 100 shares | 30 | = | 3,000 | |
Total | $17,800 |
Step 2: Compute the sale proceeds from short-term capital investment.
Security | Number of Shares | Sale Price | = | Sale Proceeds | |
Corporation G | 500 shares | $14 | = | $7,000 | |
Sports Utility Vehicle | 6,500 | ||||
Corporation B | 100 shares | 55 | = | 5,500 | |
Total | $19,000 |
Step 3: Prepare the schedule of cost and market of the investment portfolio.
Security | Sale Proceeds | – | Cost of Investment | = | Gain (Loss) |
Corporation G | $7,000 | – | $8,800 | = | $(1,800) |
Sports Utility Vehicle | 6,500 | – | 6,000 | = | 500) |
Corporation B | 5,500 | – | 3,000 | = | 2,500 |
Total | $19,000 | – | $17,800 | = | $1,200 |
Note (3): Compute business expenses amount.
Details | Amount ($) |
Processing fee for part-time tax practice | $600 |
Cost of personal computer | 7,000 |
Cost of printer | 2,000 |
Furniture cost | 3,000 |
Supplies cost | 650 |
Fee paid to computer consultant | 3,500 |
Total business expenses | $16,750 |
Note (4): Compute self-employment deduction amount.
Step 1: Compute B’s earnings from self-employment.
Details | Amount ($) |
Business income | $19,800 |
Business expenses | 16,750 |
B’s earnings | $3,050 |
Step 2: Compute net self-employment income not subject to FICA tax.
Step 3: Compute excess of Social Security portion over FICA (Federal Insurance Contributions Act Taxes) wages.
Details | Amount ($) |
Social Security ceiling | $128,400 |
Less: FICA wages | (65,000) |
Net ceiling | $63,400 |
Step 4: Compute Social Security tax on lesser of Step 2 and Step 3.
Since value of Step 2 is lesser than value of Step 3, compute Social Security Tax on value of Step 2.
Step 5: Compute Medicare tax on lesser of Step 2 and Step 3.
Since value of Step 2 is lesser than value of Step 3, compute Medicare Tax on value of Step 2.
Step 6: Compute total self-employment tax.
Details | Amount ($) |
Social Security tax | $349 |
Medicare tax | 82 |
Self-employment tax | $431 |
Step 7: Compute self-employment tax deduction amount.
Note (5): Compute the itemized deductions.
Description | Amount ($) |
Medical expenses | $0 |
Home mortgage interest | 3,845 |
Real property taxes on home | 1,766 |
Charitable contributions to church | 1,560 |
Charitable contributions to U Way | 520 |
Sales tax | 1,954 |
Total itemized deductions | $9,645 |
Working Notes:
Compute medical expenses amount.
Note: Since the medical expenses do not exceed the 2% limit, they are not subject to deduction.
Compute charitable contributions to church amount.
Compute charitable contributions to U Way.
Note (6): Calculate deduction for qualified business income.
Note (7): Compute tax liability.
Step 1: Compute tax liability of qualified dividends.
Step 2: Compute tax liability on the remaining taxable income of $59,267 ($61,467 − $2,200).
Note: Refer to the Schedule X of 2018 Federal Tax Rate Schedule.
Step 3: Compute total tax liability.
Part 2
Determine the net income tax payable or refund due for Ms B for 2019, after the changes.
Part 2
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Explanation of Solution
Determine the net income tax payable or refund due for Ms B for 2019, after the changes.
Calculation of Federal Income Tax Payable (or Refund Due) | |||
Description | Amount ($) | Amount ($) | |
Gross Income: | |||
Salary | $65,000 | ||
Interest and Dividend Income | |||
Interest income | $2,050 | ||
Dividends on B Stock | 800 | ||
Dividends on G Stock | 750 | ||
Dividends on O Stock | 650 | 4,250 | |
State income tax refund | 1,100 | ||
Net Short-Term Capital Gain | 1,200 | Refer Note 2 of Part 1 | |
Gross Income | 71,550 | ||
Less: ‘For AGI Deduction’ | (0) | ||
Adjusted Gross Income (AGI) | 71,550 | ||
Less: ‘From AGI Deduction’ | |||
Itemized deductions (9,645) or standard deduction ($18,350) , whichever is greater | (18,350) | Refer Note 5 of Part 1 | |
Taxable Income | $53,200 | ||
Tax Liability | $5,908 | Refer Note 1 of Part 2 | |
Less: Tax withholdings by employer | (10,500) | ||
Child tax credit | (2,000) | ||
Credit for child and dependent care expenses($3,000 × 20%) | (600) | ||
Adoption expenses credit | (2,000) | ||
Net tax payable (or refund due) for 2019 | $(9,192) |
Note (1): Compute tax liability.
Step 1: Compute tax liability of qualified dividends.
Step 2: Compute tax liability on the remaining taxable income of $51,000 ($53,200 − $2,200).
Step 3: Compute total tax liability.
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Chapter 13 Solutions
South-Western Federal Taxation 2019: Individual Income Taxes (Intuit ProConnect Tax Online 2017 & RIA Checkpoint 1 term (6 months) Printed Access Card)
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