Question

Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Janine Jr., Michael, and Candice). The couple received salary income of $125,000 and qualified business income of $12,500 from an investment in a partnership, and they sold their home this year. They initially purchased the home three years ago for $212,500 and they sold it for $262,500. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $17,000 of itemized deductions, and they had $3,300 withheld from their paychecks for federal taxes. They are also allowed to claim a child tax credit for each of their children. However, because Candice is 18 years of age, the Jacksons may claim a child tax credit for other qualifying dependents for Candice. (Use the tax rate schedules.)

a. What is the Jacksons’ taxable income, and what is their tax liability or (refund)? (Do not round intermediate calculations.)

c. What would their taxable income be if their itemized deductions totaled $28,500 instead of $17,000?

e. Assume the original facts but now suppose the Jacksons also incurred a loss of $5,250 on the sale of some of their investment assets. What effect does the $5,250 loss have on their taxable income?

f. Assume the original facts but now suppose the Jacksons own investments that appreciated by $10,000 during the year. The Jacksons believe the investments will continue to appreciate, so they did not sell the investments during this year. What is the Jacksons’ taxable income?

Answer 1

Question:(a) What is the Jacksons’ taxable income, and what is their tax liability or (refund)?

Answer:

Particulars	Amount
Gross income	$ 137500
[Salary]	$125,000
[Business income]	$12,500
AGI deductions	$ 0
AGI	$ 137500
Standard deductions	$ 24,400
Itemized deductions	$17,000
Greater of standard and itemized deduction	($ 24,400)
Deduction for the qualifying business income	($ 2,500) ($ 12,500*20%)
Taxable income (AGI- Itemized deductions- deduction from business income)	$ 1,10,600
Income tax liability( tax rate schedule for marriage filed jointly)	$16,049
Child tax credit	$ 2, 000 per child($ 2,000 * 3 = $ 6,000) $ 500 per dependent( $ 500 * 1 = $ 500) $ 6,000 + $ 500 = ($ 6,500)
Tax withheld for federal taxes	($3,300 )
Tax due ( refund)	$ 6,249

Question:(c) What would their taxable income be if their itemized deductions totaled $28,500 instead of $17,000?

Answer:

Particulars	Amount
Gross income	$ 137500
[Salary]	$125,000
[Business income]	$12,500
AGI deductions	$ 0
AGI	$ 137500
Standard deductions	$ 24,400
Itemized deductions	$28,500
Greater of standard and itemized deduction	($ 28,500)
Deduction for the qualifying business income	($ 2,500) ($ 12,500*20%)
Taxable income (AGI- Itemized deductions- deduction from business income)	$ 1,06,500

Question:(e)Assume the original facts but now suppose the Jacksons also incurred a loss of $5,250 on the sale of some of their investment assets. What effect does the $5,250 loss have on their taxable income?

Answer:

Particulars	Amount
Gross income	$ 1,32,250
[Salary]	$125,000
[Business income]	$ 7,250($12,500 - $5,250)
[Loss]	$5,250
AGI deductions	$ 0
AGI	$ 1,32,250
Standard deductions	$ 24,400
Itemized deductions	$17,000
Greater of standard and itemized deduction	($ 24,400)
Deduction for the qualifying business income	($ 2,500) ($ 12,500*20%)
Taxable income (AGI- Itemized deductions- deduction from business income)	$ 1,05,350

Question:(f) Assume the original facts but now suppose the Jacksons own investments that appreciated by $10,000 during the year. The Jacksons believe the investments will continue to appreciate, so they did not sell the investments during this year. What is the Jacksons’ taxable income?

Answer:

The taxable remains same as $ 1,10,600, because the appreciated investment cannot be recognized for the tax purposes. It is considered in the gross income when the asset is sold.