Chapter 16, Problem 51CP

To determine

Calculate the net tax payable or refund for person A.

Explanation of Solution

Calculate the net tax payable or refund.

Particulars	Amount($)	Amount($)
Schedule C income (Note 1)		$135,421
Interest income (Note 2)		600
Dividend income (Note 3)		145
Net long-term capital gain (Note 4)		2,925
Alimony received		–0–
		$139,091
Deductions for adjusted gross income:
50% of self-employment tax (Note 5)	$ 9,567
100% of health insurance premiums (Note 6)	23,000
Alimony paid	25,000
		(57,567)
Adjusted gross income		$ 81,524
Less: Itemized deduction
Medical expenses (Note 7)	$ 5,672
State income tax (Note 11)	1,830
Real estate tax	3,230
Home mortgage interest	8,137
Charitable contributions (Note 8)	940	(19,809)
Less: Deduction for qualified business income (Note 12)		(11,729)
Taxable income		$ 49,986
Tax on taxable income (Note 10)		$ 6,722
Self-employment tax (Note 5)		19,134
Child or dependent tax credit (Note 9)		–0–
Estimated tax payments		(26,000)
Net tax payable (or refund due) for 2018		($ 144)

Table (1)

Notes:

1. 1) Calculate the schedule C net income:

Particulars	Amount($)
Revenue	$315,000
Less:
Office expense	$66,759
Employee salaries	$63,000
Employee payroll taxes	$4,820
Business meal expense (after 50% reduction)	$11,000
Rent expense	$34,000
Schedule C net income	$135,421

Table (2)

1. 2) Interest income ($800) from the bond is excludible from gross income.
2. 3) Calculate the dividend income:

Particulars	Amount($)
B	$30
G	$70
P	$45
Dividend income	$145

Table (3)

1. 4) There is a $495 short-term capital loss and a $3,420 long-term capital gain. These net to a $2,925 long-term capital gain. All of this gain is 0%/15%/20% gain.

   Short-term: B$\left[\left(\text{10 shares × \$74}\right)\text{ - }\left(\text{10 shares × \$80}\right)\text{ = \$60 loss}\right]$  + P $\left[\left(\text{15 shares × \$33}\right)\text{ - }\left(\text{15 shares × \$62}\right)\text{ = \$435 loss}\right]$  = $495 short-term loss.

       Long-term: G $\text{[}\left(\text{30 shares × \$157}\right)\text{ - (30 shares ×\$43)] = \$3,420}$ long-term gain.

1. 5) The self-employment tax is $19,134$\text{[}\left(\text{\$135,421 Schedule C net income × }\text{.9235 × }\text{.153}\right)$ ; net earnings from self-employment $\left(\$135,421\times .9235=\$125,061\right)$ are less than the $128,400 cap for the combined Social Security and Medicare tax rate of 15.3%]. The deduction for AGI associated with the self-employment tax is $9,567 $\left(\$19,134\times 50\%\right).$
2. 6) The AGI deduction for Ashley’s health insurance deduction is $23,000 ($23,000 premiums × 100%). A can deduct the medical insurance related to bill, even though he is not a dependent (see Note 9). The gross income test is waived for medical expense purposes.
3. 7) Calculate the deductible medical expense.

Particulars	Amount($)
Medical expense	$11,786
Less: 7.5% of AGI$\left(7.5\%\times \$81,524\right)$	(6,114)
Deductible medical expense	$5,672

Table (4)

1. 8) The $459 of cash provided directly to homeless persons is not deductible because it was not made to a charitable organization.
2. 9) B does not qualify as A dependent because he is not her qualifying child. He is over age 18 and is not a full-time student. Thus, he fails the age test for a qualifying child. He is a potential qualifying relative, but fails the $4,050 gross income test because his gross income was $4,655. Even though B lives with A and is fully supported by her, he must qualify as her dependent for A to have head-of-household filing status. As B is not A dependent, A is not entitled to a dependent tax credit for B.
3. 10) Ashley qualifies for single filing status. Of the $49,986 of taxable income, $3,070 ($2,925 of net long-term capital gain and the $145 of qualifying dividend income) is taxed at 15% because other taxable income exceeds $38,600, the point at which A is no longer eligible for the 0% alternative tax.

Calculate the tax savings from alternative computation.

Particulars	Amount($)
Tax liability on $46,916 ($49,986 − $3,070) other taxable income from the 2018 Tax Tables (Single)	$ 6,261
Tax liability on LTCG and qualified dividend income ($3,070 × 15%)	461
Total tax liability using the alternative tax computation	$ 6,722
Total tax liability on $49,986 taxable income [from the 2018 Tax Tables (Single)]	(6,936)
Tax savings from alternative tax computation	$ 214

Table (5)

1. 11) The state income tax of $1,830 is fully deductible (and it is greater than the $619 state and local sales tax deduction). The combined state income tax and real property tax deduction cannot exceed $10,000. $1,830 state income tax + $3,230 real property tax = $5,060.
2. 12) Her § 199A deduction for qualified business income is $11,729, the lesser of:
3. a) 20% of A $135,421 qualified business income ($135,421 × 20% = $27,084),
4. b) 20% of A taxable income before the deduction for qualified business income ($61,715; $81,524 AGI − $19,809 itemized deductions) minus the net capital gain and qualified dividend income $\left(\$3,070\right).\$61,715-\$3,070=\$58,645;\$58,645\times 20\%=\$11,729.$