Chapter 7, Problem 51CP

1.

To determine

Calculate Person J’s Federal income tax payable during 2018.

Explanation of Solution

Federal tax laws: “Federal tax laws reflect the three branches of the federal government. It is a combination of laws enacted by political parties, explanations given by the treasury department, the Internal Revenue Service (IRS) and the decisions of court”.

Calculate Person J’s Federal income tax payable during 2018.

Particulars	Amount	Amount	Amount	Amount
Salary and bonus $\left(\$100,000+\$1,000\right)$				$101,000
Typing service business net receipts $\left(\text{\$20,000}-\text{\$24,580}\right)$				($4,580)
Interest income (Refer to Note 1)				$700
Life insurance proceeds (Refer to Note 2)				$0
Gift (Refer to Note 3)				$0
Bingo prize				$100
Alim				$10,000
Non-business bad debt ( Refer to Note 4)				($2,100)
Adjusted gross income				$105,120
Less: Itemized deductions			$9,500
Home mortgage interest			$2,500
Charitable contributions			$953
Sales taxes			$3,200
Property taxes
Silverware loss: Lesser of adjusted basis of  $14,000 or FMV of $15,000	$14,000
Less: Insurance proceeds	($10,000)
Less: $100	($100)	$3,900
Auto: Lesser of decline in FMV ($7,000) or adjusted basis ($52,000)	$7,000
Less: Insurance proceeds if claim filed	($2,000)
Less: $100	($100)	$4,900
Total ( Refer to Note 5)		$8,800	$0
Total itemized deductions				($16,153)
Less: Deduction for qualified business income (Refer to Note 6)				$0
Taxable income				$88,967
Tax on taxable income (from 2018 Tax Tables; Single)				$15,644
Less: Federal income tax withheld and  estimated tax payments $\left(\text{\$15,000}+\text{\$2,000}\right)$				($17,000)
Net tax payable (or refund due) for 2018				$356

Table (1)

Notes:

1. 1) The $800 interest payable on the “City of Boca Raton bonds” is exempted from tax.
2. 2) Life insurance proceeds of $60,000 paid due to the death of Person J’s sister are excluded from gross income.
3. 3) The gift amount of $5,000 from Person J’s aunt is excluded from gross income.
4. 4) The loss of $2,100 on the loan to the friend Person JJ is deducted as a non-business bad debt (that is short-term capital loss). The loan is considered as a “bona fide loan”.
5. 5) As the theft loss and casualty loss occurred due to “Federally declared disaster, neither is deductible”.
6. 6) As Person J is having no qualified business income, no deduction for qualified business income is permitted. The business loss of $4,580 is carried over to 2019 and will equalize any business income in 2019 (or upcoming years), decreasing the associated deduction for qualified business income.

2.

To determine

Provide a tentative calculation of Person J’s taxable income for 2019 and prepare a memo regarding tax files.

Explanation of Solution

Calculate Person J’s taxable income:

Particulars	Amount	Amount	Amount
Salary and bonus			$101,000
Gross receipts from business		$34,000
Less:
Office rent	$7,000
Supplies	$4,840
Utilities and telephone	$5,148
Wages	$5,500
Payroll taxes	$550
Equipment rentals	$3,300	($26,338)
Net business income			$7,662
Interest income			$700
Alimony			$10,000
Less: Self-employment tax deduction (Refer to note 1)			($542)
Adjusted gross income			$118,820
Less: Itemized deductions (Refer to note 2)			($16,153)
Deduction for qualified business income $\begin{array}{l}\text{[(\$7,662}-\text{\$542 self-employment tax deduction}\hfill \\ \text{ \$4,580 business loss from 2018) × 20\%]}\hfill \end{array}$  (Refer to note 3)			($508)
Taxable income			$102,159

Table (2)

Notes:

1. 1. Self-employment tax is $1,083$\left(\text{\$7,662×0}\text{.9235×15}\text{.3\%}\right)$; one-half of these amounts are taken “for AGI deduction”.
2. 2. Higher than 2019 single standard deduction of $12,200.
3. 3. Taxable income prior to the QBI deduction is $102,667; this is also modified taxable income. Therefore the QBI deduction is not restricted by the whole taxable income limitation

   $\text{(modified taxable income × 20\%)}$

Prepare a memo:

Memo

From

Student A

To

Person J

Dear Sir,

Sub: Person J’s 2019 tentative calculation of taxable income.

From my observation, Person S wanted an approximation of the taxable income of 2019.

Besides to the gross receipts from Person S’s typing business of $34,000 (increase-from $20,000 in 2018), the following projection for 2019 are given by Person J:

(1) Following are the items that remain unchanged from 2018:

Particulars	2018	2019
Salary	$100,000	100,000
Christmas bonus	$1,000	$1,000
Itemized deductions	$16,153	$16,153
Interest income	$700	$700
Alimony	$10,000	$10,000
Office rent expense	$7,000	$7,000

Table (3)

(2) Business expenses expected to increase by 10% from 2018 to 2019:

Particulars	2018	2019
Supplies	$4,400	$4,840
Utilities and telephone	$4,680	$5,148
Wages	$5,000	$5,500
Payroll taxes	$500	$550
Equipment rentals	$3,000	$3,300

Table (4)

(3) The following 2018 items will not recur in 2019: life insurance proceeds ($60,000), gift ($5,000), bingo winnings ($100), bad debt ($2,100), stolen silverware, auto accident.

Particulars	Amount	Amount	Amount
Salary and bonus			$101,000
Gross receipts from business		$34,000
Less:
Office rent	$7,000
Supplies	$4,840
Utilities and telephone	$5,148
Wages	$5,500
Payroll taxes	$500
Equipment rentals	$3,300	($26,338)
Net business income			$7,662
Interest income			$700
Alimony			$10,000
Less: Self-employment tax deduction (Refer to note 4)			($542)
Adjusted gross income			$118,820
Less: Itemized deductions (Refer to note 5)			($16,153)
Deduction for qualified business income $\begin{array}{l}\text{[(\$7,662}-\text{\$542 self-employment}\hfill \\ \text{Tax deduction \$4,580 business loss from 2018}\times \text{20\%)}\hfill \end{array}$  (Refer to note 6)			($508)
Taxable income			$102,159

Table (5)

Notes:

1. 4. Self-employment tax is $1,083 $\left(\text{\$7,662×0}\text{.9235×15}\text{.3\%}\right)\text{;}$ one-half of these amounts are taken “for AGI deduction”.
2. 5. Higher than 2019 single standard deduction of $12,200.
3. 6. Taxable income prior to the QBI deduction is $102,667; this is also modified taxable income. Therefore the QBI deduction is not restricted by the whole taxable income limitation. $\text{(modified taxable income × 20\%)}$.