Question

Fareh is not married and supports her 12 year old child who lives with her. Fareh works as an employee with gross salaries and wages of $122,000. Fareh’s only other income was interest of $7,300, qualifying dividends of $3,150, and other information follows:

Contribution to solo(k) retirement plan, withheld from the salary $ 4,500

Loss on sale of Alphatech stock held 2 years -3,700

Mortgage interest on primary residence 4,950

State and local property tax on residence 3,350

Property tax included in personal auto registration 160

State sales taxes paid 370

State income taxes paid 1,800

Charitable contributions of cash 1,750

Political contributions 550

All information is for 2020. Calculate Fareh’s adjusted gross income, taxable income, and gross tax. Show your work!

Answer 1

Calculation of Fareh’s adjusted gross income & taxable income and gross tax.

	Computation of Taxable income
		$
	Gross salaries and wages of	1,22,000
Less:	Contribution to solo(k) retirement plan	4,500	1,17,500
	Income from House property
	Net annual value of house property	NIL
Less:	Mortgage interest on primary residence	4950	-4,950
	Other Income:
	Interest income	7300
	Dividend income	3150	10,450
	Gross total income		1,23,000
Less:
	Deductions allowed:
	Loss on sale of Alphatech stock held 2 years	3700
	State sales taxes paid	370
	State income taxes paid	1800
	Charitable contributions of cash	1750	7620
	Taxable income		1,15,380

Summary:

1. Contribution for retirement benefit will be allowed as deduction under income from wages and salaries of $ 4500

2. In given example only one primary residential house is given so net annual value of such property will be considered as NIL. But interest on mortgage loan taken by taxpayer will be consider as an expenses and allowed as deduction so income form house property shows negative value. Which will be set off against other heads of income?

3. Interest and dividend received will be considered as income from other sources.

4. Charitable contribution will be allowed as deduction from gross total income.

5. State and local property tax on residence & Property tax included in personal auto registration will not be considered as deduction from total income.