CengageNOWv2, 1 term Printed Access Card for Hoffman/Young/Raabe/Maloney/Nellen's South-Western Federal Taxation 2018: Individual Income Taxes, 41st
41st Edition
ISBN: 9781337389518
Author: William H. Hoffman, James C. Young, William A. Raabe, David M. Maloney, Annette Nellen
Publisher: Cengage Learning
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Question
Chapter 15, Problem 57CP
To determine
Compute the lowest net tax payable or refund due for 2018.
Expert Solution & Answer
Explanation of Solution
Compute the lowest net tax payable or refund due for 2018:
| Particulars | Amount ($) |
| Business income (Note 1) | $146,500 |
| Dividend Income | $12,000 |
| Interest income | $13,500 |
| Capital loss (Note 3) | ($3,000) |
| Self employment tax deduction (Note 4) | ($9,923) |
| Self employed health insurance (Note 4) | ($8,000) |
| Adjusted gross income | $151,077 |
| Less: Itemized deductions (Note 6) | ($29,900) |
| Deduction for qualifies business income (Note 7) | ($21,835) |
| Taxable income | $99,342 |
| Income tax computation: | |
| Tax on taxable income of $99,342 (Note 8) | $15,660 |
| Self employment tax (Note 4) | $19,845 |
| Tax liability before prepayments and credits | $35,505 |
| Less: Estimated tax payments | ($35,000) |
| Dependent tax credit (Note 9) | ($0) |
| Net tax payable (or refund) for 2018 | $505 |
Table (1)
Therefore, Net tax payable for the year 2018 is $505.
Working note 1: Compute the business income:
| Particulars | Amount ($) | Amount ($) |
| Sales revenue | $740,000 | |
| Less: Cost of goods sold | ($405,000) | |
| Gross profit | $335,000 | |
| Less: Salary expense | $88,000 | |
| Rent expense | $30,000 | |
| Utilities | $8,000 | |
| Telephone | $6,500 | |
| Advertising | $4,000 | |
| | $5,000 | |
| Depreciation | $21,000 | |
| Health insurance for employees | $18,000 | |
| Accounting and legal fees | $7,000 | |
| Supplies | $1,000 | ($188,500) |
| Net income | $146,500 |
Table (2)
Note: Out of the health insurance payments, only the $18,000 of health insurance paid for employees is allowed as a deduction while computing the net income of the sole proprietorship. The $8,000 paid for Person D eligible as a deduction for AGI.
Working Note 2: The amount of $17,000 interest on the County of SF, NM bonds is expelled from the gross income.
Working note 3: Compute the capital loss:
Compute the recognized gain or loss for each item:
Item a:
| Particulars | Amount ($) |
| Amount realized | $45,000 |
| Less: Adjusted basis | ($50,000) |
| Realized loss | ($5,000) |
| Recognized loss (long-term capital loss) | ($5,000) |
Table (3)
Item b: The $300,000 inheritance is barred from Person D’s gross income. His adjusted basis for Incorporation GR’s stock is the cost of $200,000, and his adjusted basis for Incorporation G’s, stock is $100,000.
Item c: Gifts are expelled from Person D’s gross income. His adjusted basis for the Incorporation O’s stock is a postpone basis of $5,000. His holding period also is a postpone holding period (i.e., it comprises Person J’s holding period, which began April 1, 2012).
| Item c. | |
| Amount realized | $22,000 |
| Less: Adjusted basis | ($5,000) |
| Realized gain | $17,000 |
| Recognized gain (long-term capital gain) | $17,000 |
Table (4)
Item d:
| Item d. | |
| Amount realized | $40,000 |
| Less: Adjusted basis | ($100,000) |
| Realized loss | ($60,000) |
| Recognized loss (short-term capital loss) | ($60,000) |
Table (5)
Item e:
| Item e. | |
| Amount realized | $0 |
| Less: Adjusted basis | ($52,500) |
| Realized loss | ($52,500) |
| Recognized loss (long-term capital loss) | ($52,500) |
Table (6)
Item f:
| Item f. | |
| Amount realized | $245,000 |
| Less: Adjusted basis | ($210,000) |
| Realized gain | $35,000 |
| Recognized gain (long-term capital gain) | $25,000 |
Table (7)
Item g:
| Item g. | |
| Amount realized | $451,500 |
| Less: Adjusted basis | ($180,000) |
| Realized gain | $271,500 |
| § 121 exclusion | ($250,000) |
| Recognized gain (long-term capital gain) | $21,500 |
Table (8)
Person D eligible’s for the § 121 exclusion since he has owned and occupied the residence as his principal residence throughout at least two of the five years prior to the date of sale. Therefore, his realized gain of $271,500 is decreased to $21,500.
Repair expenses of amount $9,400 are neither capitalizable nor allowed as deduction.
Person D’s
| Long term capital gains: | ||
| Incorporation O’s stock | $17,000 | |
| Residence | 21,500 | |
| T land | 25,000 | $63,500 |
| Long-term capital losses: | ||
| Incorporation B’s stock | ($5,000) | |
| Incorporation Y stock | ($52,500) | ($57,500) |
| Net long-term capital gain | $6,000 | |
| Short-term capital loss: | ||
| Incorporation G’s stock | ($60,000) | |
| Net capital loss | ($54,000) |
Table (9)
Out of $54,000 capital loss, only $3,000 of the net capital loss can be allowed as a deduction in the year 2018. The balance amount of $51,000 is carried forwarded to the following year (2019).
Working note 4: Compute the self-employment tax:
| Particulars | Amount ($) |
| Step 1: Net profit from Schedule C (line 31 of Schedule C) | $146,500 |
| Step 2: Multiply step 1 amount by 92.35% | $135,293 |
| Step 3: If the amount in step 2 is $128,400 or less, multiply the step 2 amount by 15.3%. If the step 2 amount is more than $128,400, multiply the excess of the step 2 amount ($135,293) over $128,400 by 2.9% and add $19,645.20. This is the self-employment tax. | $19,845.10 |
Table (10)
The deduction for AGI for part of the self-employment tax is $9,923 (50% of $19,845.10).
Working note 5: Out of the amount $8,000 of health insurance premiums paid for Person D 100% is allowed as a deduction for AGI.
Working note 6: Compute the itemized deductions:
| Itemized deductions: | |
| Medical expenses | $0 |
| Property taxes and sales taxes (greater than $4,000 state income taxes); limited to $10,000 | $10,000 |
| Charitable contributions | $10,000 |
| Mortgage interest | $9,900 |
| Total itemized deductions | $29,900 |
Table (11)
Working note 7: Person D’s taxable income previous to the eligible business income deduction is $121,177
- (a) 20% of qualified business income $29,300
- (b) 20% of taxable income prior to the qualified business income deduction, decreased by any net capital gain (including any qualified dividends) is $21,835
Working note 8: Compute the taxable income:
All of Person D’s qualified dividends of $12,000 are taxed at 15% as his taxable income net of the qualified dividends goes above $51,700 and the head-of-household zero percent rate thresholds.
| Particulars | Amount ($) |
| Taxable income | $99,342 |
| Qualified dividends | ($12,000) |
| Portion of taxable income taxed at regular tax rates | $87,342 |
| Tax on qualified dividends | $1,800 |
| Tax on $87,342 from the 2018 Tax Tables (Head of Household) | 13,860 |
| Tax on taxable income | $15,660 |
Table (12)
Working note 9: Determine the dependent tax credit:
The child tax credit is not available (As Person T is 18, hence he is not eligible as child).
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Chapter 15 Solutions
CengageNOWv2, 1 term Printed Access Card for Hoffman/Young/Raabe/Maloney/Nellen's South-Western Federal Taxation 2018: Individual Income Taxes, 41st
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