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Calculate 2018 federal income tax payable (or refund due) for J.
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Explanation of Solution
Calculate 2018 federal income tax payable (or refund due) for J.
Step 1: Compute taxable income of J.
Details | Amount ($) | Amount ($) | References |
Net business income | 17,500 | Refer working note 1 | |
Interest income | 4,000 | ||
Gross income | $21,500 | ||
Less: Deduction for AGI | |||
Self-employment tax deduction | (1,237) | Refer working note 2 | |
Adjusted gross income(AGI) | 20,263 | ||
Less: ‘ From AGI deductions’ | |||
Itemized deductions | (12,650) | Refer working note 3 | |
Deduction for qualified business income | (1,523) | (14,173) | Refer working note 4 |
Taxable income | $6,090 |
Step 2: Compute net tax payable or refund due for J.
Details | Amount ($) | Amount ($) | Reference |
Tax liability | 609 | Refer working note 5 | |
Add: Self-employment tax | 2,473 | Refer working note 2 | |
Total tax liability | 3,082 | ||
Less: Estimated tax payments | (3,000) | ||
Net tax payable (refund due) | $82 |
Hence, 2018 federal income tax payable for J is $82.
Working note (1):
Calculate net business income of J.
Details | Amount ($) | Amount ($) |
Income from sales | 85,000 | |
Less: Expenses | ||
Rent | 16,500 | |
Utilities | 7,900 | |
Supplies | 1,800 | |
Insurance | 5,000 | |
Travelling expense | 2,300 | |
Meals | 600 | |
| 33,400 | (67,500) |
Income from business | $17,500 |
Calculate the amount for meals.
Calculate the amount for travelling expense.
Calculate Depreciation and §179 deduction for J.
Calculate MACRS deduction for furniture and fixtures.
Step 1: Calculate the cost recovery for furniture and fixtures.
Step 2: Calculate maximum total depreciation deduction.
Calculate MACRS deduction for computer equipment.
Step 1: Calculate the cost recovery for computer equipment.
Step 2: Calculate maximum total depreciation deduction.
Calculate the Depreciation and §179 deduction for J.
Details | Amount ($) |
MACRS Deduction for furniture and fixtures | 21,000 |
MACRS Deduction for computer equipment | 12,400 |
Total MACRS deductions | $33,400 |
Working note (2):
Calculate self-employment tax deduction.
Step 1: Calculate self-employment tax.
2018 Self-employment tax Worksheet | ||
1. | Net earnings from self-employment. | $17,500 |
2. | Multiply line 1 by 92.35%. | $16,161 |
3. | If amount on line 2 is $132,900 or less, multiply line 2 by 15.3%. This is the self-employment tax. | $ 2,473 |
4. | If amount on line 2 is more than $132,900, multiply the excess over $132,900 by 2.9% and add $20,333.70. This is the self-employment tax. |
Step 2: Calculate self-employment tax deduction.
In 2018, ‘For AGI Deduction’ the deduction part of the self-employment tax is 50% of self-employment tax. Hence, the deduction is $1,237
Working note (3):
Calculate the itemized deductions.
Details | Amount ($) |
State income tax | 2,950 |
Home mortgage interest | 6,000 |
Property taxes on home | 2,500 |
Charitable contributions | 1,200 |
Total itemized deductions | 12,650 |
Working note (4):
Calculate deduction for qualified business income.
Working note (5):
Calculate tax liability on taxable income of $6,090.
Single Tax payer - Use Schedule – X for the tax rates for the year 2018:
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Chapter 8 Solutions
Individual Income Taxes
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