Chapter 14, Problem 57CP

Alton Newman, age 67, is married and files a joint return with his wife, Clair, age 65. Alton and Clair are both retired, and during 2018, they received Social Security benefits of $10,000. Both Alton and Clair are covered by Medicare. Alton’s Social Security number is 111-11-1119, and Clair’s is 123-45-6786. They reside at 210 College Drive, Columbia, SC 29201.

Alton, who retired on January 1, 2018, receives benefits from a qualified pension plan of $2,750 a month for life. His total contributions to the plan (none of which were deductible) were $168,250. In January 2018, he received a bonus of $2,000 from his former employer for service performed in 2017. No income taxes were withheld on this bonus by his former employer (Amalgamated Industries, Inc.; EIN 12-3456789; 114 Main Street, Columbia, SC 29201). Although Amalgamated Industries, Inc., accrued the bonus in 2017, it was not paid until 2018.

Clair, who retired on December 31, 2017, started receiving benefits of $1,400 a month on January 1, 2018. Her contributions to the qualified pension plan (none of which were deductible) were $74,100.

On September 27, 2018, Alton and Clair received a pro rata 10% stock dividend on 600 shares of stock they owned. They had bought the stock on March 5, 2011, for $20 a share. On December 16, 2018, they sold the 60 dividend shares for $55 a share.

On October 10, 2018, Clair sold the car she had used in commuting to and from work for $17,000. She had paid $31,000 for the car in 2012.

On July 14, 2010, Alton and Clair received a gift of 1,000 shares of stock from their son, Thomas. Thomas’s basis in the stock was $35 a share (fair market value at the date of gift was $25). No gift tax was paid on the transfer. Alton and Clair sold the stock on October 8, 2018, for $24 a share.

On May 1, 2018, Clair’s mother died, and Clair inherited her personal residence. In February 2018, her mother had paid the property taxes for 2018 of $2,100. The residence had a fair market value of $235,000 and an adjusted basis to the mother of $160,000 on the date of her death. Clair listed the house with a real estate agent, who estimated it was worth $240,000 as of December 31, 2018.

Clair received rent income of $6,000 on a beach house she inherited three years ago from her uncle Charles. She had rented the property for one week during the July 4 holiday and one week during the Thanksgiving holiday. Charles’s adjusted basis in the beach house was $150,000, and its fair market value on the date of his death was $240,000. Clair and Alton used the beach house for personal purposes for 56 days during the year. Expenses associated with the house were $3,700 for utilities, maintenance, and repairs; $2,200 for property taxes; and $800 for insurance. There are no mortgages on the property.

Clair and Alton paid estimated Federal income tax of $2,000 and had itemized deductions of $6,800 (excluding any itemized deductions associated with the beach house). If they have overpaid their Federal income tax, they want the amount refunded. Both Clair and Alton want $3 to go to the Presidential Election Campaign Fund.

Compute their net tax payable or refund due for 2018, using the appropriate tax rate schedule (not the Tax Tables). If you use tax forms for your computations, you will need at a minimum Form 1040 and Schedule D. Suggested software: ProConnect Tax Online.

To determine

Calculate the net tax payable or refund due for the year 2018 by using the tax rate schedule.

Explanation of Solution

Computation of net tax payable

Particulars	Amount ($)	Amount ($)
Person A’s retirement income (1)		$23,386
Person C’s retirement income (2)		13,380
Person A’s bonus (3)		$2,000
Social security benefits (4)		$5,829
Net long-term capital gain (5,6,7,8)		$1,209
Adjusted gross income		$45,804
Less: Standard deduction (10)		($26,600)
Taxable income		$19,204
Tax on $19,204 (11)		$1,798
Less: Prepayments and credits
Estimated tax paid	$2,000
Tax credit for the elderly (12)	$0	($2,000)
Income tax payable or refund due		($202)

Table (1)

Notes:

1. 1. Compute Person A’s retirement income.

   $\begin{array}{c}\frac{\text{Person A's investment in plan}}{\text{Number of anticipated payments}}=\frac{\$168,250}{210}\\ =\$801.19\text{ exclusion per month}\end{array}$

Particulars	Amount ($)
Annual payments $\left(\$2,750\times 12\right)$	$ 33,000
Exclusion $\left(\$801.19\times 12\right)$	($ 9,614)
Amount included in gross income	$ 23,386

Table (2)

1. 2. Compute Person C’s retirement income.

   $\begin{array}{c}\frac{\text{Person C's investment in plan}}{\text{Number of anticipated payments}}=\frac{\$74,100}{260}\\ =\$285\text{ exclusion per month}\end{array}$

Particulars	Amount ($)
Annual payments $\left(\$1,400\times 12\right)$	$ 16,800
Exclusion $\left(\$285\times 12\right)$	($ 3,420)
Amount included in gross income	$ 13,380

Table (3)

1. 3. Person A is a cash-basis tax payer. Thus, Person A included the $2,000 bonus in the gross income for the year 2018.
2. 4. As the social security benefits exceeds $44,000, the amount of social security benefits that would be includible in gross income is lesser of $\left(0.85\times 10,000=\$8,500\right)$ or $\left[0.85\left(\$39,975+0.50\left(\$10,000\right)-\$44,000\right)+0.50\left(\$10,000\right)=\$5,829\right]$ .
3. 5. Compute the long-term capital gain.

Particulars	Amount ($)
Amount realized from the sale $\left(60\text{ shares}\times \text{\$55}\right)$	$3,300
Less: Basis of stock sold $\left[\frac{\$12,000}{660}\times 60\text{ shares}\right]$	($1,091)
Long-term capital gain	$2,209

Table (4)

1. 6. The loss of $14,000$\left(\$17,000-\$31,000\right)$ on the sale of Person C’s personal use car is not deductible.
2. 7. Compute the long-term capital loss.

Particulars	Amount ($)
Amount realized from the sale $\left(1,000\times \$24\right)$	$4,000
Less: Basis for the loss $\left(1,000\times \$25\text{ per share}\right)$	($25,000)
Long-term capital loss	($1,000)

Table (5)

1. 8. Person C’s inheritance of the personal residence from the mother is excludible from the gross income. Gain or loss in not recognized until Person C sells the house. Person C’s basis is $235,000.
2. 9. As Person C has rented the beach house for only 14 days, $6,000 of the rental income received could be excluded from the gross income. The amount of $3,700 paid for the utilities, repairs and maintenance or $800 paid for the insurance could not be deducted.
3. 10. The standard deduction of $26,600 is exceeding the itemized deductions of $9,000.

Compute the amount of itemized deductions.

Particulars	Amount ($)
Other itemized deductions	$6,800
Associated with the beach house:
Property taxes	$2,200
Itemized deductions	$9,000

Table (6)

1. 11. Out of $19,204 taxable income, the net long-term capital gain of $1,209 is taxed separately. The tax liability on $17,995 from the 2018 tax tables is $1,798. The net long-term capital gain of $1,209 is taxed at a 0% rate.
2. 12. While computing the tax credit for the elderly, the statutory maximum amount of $7,500 has been decreased to $4,171. This is because Person A and Person C’s 2018 adjusted gross income is higher than or $10,000, the base should be reduced by additional amount of $17,902$\left(50\%\times \left(\$45,804-\$10,000\right)\right)$. By decreasing the amount of $7,500 by $22,073$\left(\$4,171+\$17,902\right)$ generates a negative amount, as a result of this the tax credit for the elderly is $0.