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 2020).

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

	Description	Amount
(1)	Gross income
(2)	For AGI deductions
(3)	Adjusted gross income
(4)	Standard deduction
(5)	Itemized deductions
(6)
(7)	Deduction for qualified business income
(8)	Total deductions from AGI

Taxable income?

Answer 1

Computation of Jacksons' (Tax Refund) / Tax Due for Tax Year 2020

	Description	Explanation	Amount ($)
(1)	Gross income	Salary income + Qualified business income = $125000 + $12500 Note - Gain on sale of home is excluded.	137500
(2)	For AGI deductions	-	0
(3)	Adjusted gross income	Same as gross income	137500
(4)	Standard deduction	Standard deduction for Married, filing jointly	24800
(5)	Itemized deductions	Given in question	17000
(6)	Greater of standard deduction or itemized deductions	Greater of: (4) or (5)	24800
(7)	Deduction for qualified business income	$12500 * 20%	2500
(8)	Taxable income	(3) - (6) - (7) = $137500 - $24800 - $2500	110200
(9)	Income tax liability	Refer working note - (1)	15824
(10)	Child tax credit	$2000 per qualifying child and $500 per qualifying dependent. = ($2000 * 3) + ($500 * 1)	6500
(11)	Tax withholding	Given in question	3300
Tax Due	(9) - (10) - (11) = $10109 - $6500 - $3550	6024

# Working note - (1) - Computation of Jacksons' Tax Liability for Tax Year 2020 -

	Tax Rate	Taxable Income ($)	Calculation	Amount ($)
I.	10%	0 - 19750	$19750 * 10%	1975
II.	12%	19750- 80250	($80250 - $19750) * 12%	7260
III.	22%	80250 - 110200	($80250 - $110200) * 22%	6589
Income tax liability	I + II + III	15824

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

Computation of Jacksons' (Tax Refund) / Tax Due for Tax Year 2020

	Description	Explanation	Amount ($)
(1)	Gross income	Salary income + Qualified business income = $125000 + $12500 Note - Gain on sale of home is excluded.	137500
(2)	For AGI deductions	-	0
(3)	Adjusted gross income	Same as gross income	137500
(4)	Standard deduction	Standard deduction for Married, filing jointly	24800
(5)	Itemized deductions	Given in question	28500
(6)	Greater of standard deduction or itemized deductions	Greater of: (4) or (5)	28500
(7)	Deduction for qualified business income	$12500 * 20%	2500
(8)	Taxable income	(3) - (6) - (7) = $137500 - $28500 - $2500	106500