Question

Reba Dixon is a fifth-grade school teacher who earned a salary of $38,200 in 2018. She is 45 years old and has been divorced for four years. She receives $1,295 of alimony payments each month from her former husband (divorced in 2016). Reba also rents out a small apartment building. This year Reba received $50,500 of rental payments from tenants and she incurred $19,695 of expenses associated with the rental.

Reba and her daughter Heather (20 years old at the end of the year) moved to Georgia in January of this year. Reba provides more than one-half of Heather’s support. They had been living in Colorado for the past 15 years, but ever since her divorce, Reba has been wanting to move back to Georgia to be closer to her family. Luckily, last December, a teaching position opened up and Reba and Heather decided to make the move. Reba paid a moving company $2,200 to move their personal belongings, and she and Heather spent two days driving the 1,464 miles to Georgia.

Reba rented a home in Georgia. Heather decided to continue living at home with her mom, but she started attending school full-time in January at a nearby university. She was awarded a $3,190 partial tuition scholarship this year, and Reba helped out by paying the remaining $690 tuition cost. If possible, Reba thought it would be best to claim the education credit for these expenses.

Reba wasn't sure if she would have enough items to help her benefit from itemizing on her tax return. However, she kept track of several expenses this year that she thought might qualify if she was able to itemize. Reba paid $5,990 in state income taxes and $12,690 in charitable contributions during the year. She also paid the following medical-related expenses for herself and Heather:

Insurance premiums	$	5,985
Medical care expenses	$	1,290
Prescription medicine	$	350
Nonprescription medicine	$	290
New contact lenses for Heather	$	390

Shortly after the move, Reba got distracted while driving and she ran into a street sign. The accident caused $1,090 in damage to the car and gave her whiplash. Because the repairs were less than her insurance deductible, she paid the entire cost of the repairs. Reba wasn’t able to work for two months after the accident. Fortunately, she received $2,190 from her disability insurance. Her employer, the Central Georgia School District, paid 60% of the premiums on the policy as a nontaxable fringe benefit and Reba paid the remaining 40% portion.

A few years ago, Reba acquired several investments with her portion of the divorce settlement. This year she reported the following income from her investments: $2,390 of interest income from corporate bonds and $1,690 interest income from the City of Denver municipal bonds. Overall, Reba’s stock portfolio appreciated by $12,190 but she did not sell any of her stocks.

Heather reported $6,580 of interest income from corporate bonds she received as gifts from her father over the last several years. This was Heather’s only source of income for the year.

Reba had $10,000 of federal income taxes withheld by her employer. Heather made $1,000 of estimated tax payments during the year. Reba did not make any estimated payments. Reba had qualifying insurance for purposes of the Affordable Care Act (ACA).

a. Determine Reba’s federal income taxes due or taxes payable for the current year. Use Tax Rate Schedule for reference. (Round your intermediate computations and final answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.)

b. Is Reba allowed to file as a head of household or single?

c. Determine the amount of FICA taxes Reba was required to pay on her salary. (Round your final answer to the nearest whole dollar amount.)

d. Determine Heather’s federal income taxes due or payable. Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates, Estates and Trusts for reference.  (Round your intermediate computations and final answer to the nearest whole dollar amount.)

Answer 1

(a) Reba’s federal income taxes due or taxes payable for the current year.

Description	Amount($)	Explanation
Salary income	38200
Alimony	15540	$1295 per month x 12 months
Rent recieved	50500
Disability insurance recieved	1314	Only the employer portion will be included as it is taxable perquisite. The taxable portion is 60% of 2190 = $ 1314
Interest income from corporate bond	2390
Interest income from muncipal bonds	0	Tax exempt
(1) Gross income	107944
Expenses for rental property	19695
Moving expense	0	Not deductible unless a taxpayer is an active duty member of the military
(2) Total deductions for AGI	19695
(3) AGI	88249
From AGI Deductions
Itemised deductions
Medical expense	1686	Medical expense that exceeds 7.5% of AGI are allowed as deduction = (5985+1290+350+290+390) - 7.5% x 88249 = 8305 -6619 = $ 1686
State income tax	5990	fully deductible
charitable contribution	12690	fully deductible
casualty loss	0	not deductible
(4)Total itemised deduction	20366
(5) Standard deduction	18000	As per head of household filing requirement
(6) Greater of itemized deductions or standard deduction	20366	Greater of (4) or (5)
(7) Taxable income	67883	(3) - (6)
(8) Tax on taxable income	9482	As per head of household tax slab rates $5,944 plus 22% of the amount over $51,800 = 5944 + 22% x ( 67883 - 51800) = $ 9482
(9) Tax credit for tution fees	690	Tution fees paid for heather
(10) Tax prepayment	10000
(11) Tax refund	1208	(10) + (9) - (8)

Note: A detailed explanation of why we have taken Reba as head of household has been explained in answer (b)

(b) To file as head of household, a taxpayer must satisfy the following conditions:

• Pay for more than half of the household expenses
• Be considered unmarried for the tax year, and
• Taxpayer must have a qualifying child or dependent.

To be considered a qualifying child, the child must meet the the following criteria

• The child must be your biological child, stepchild, foster child, sibling, step sibling, half sibling, or a descendant (child, grandchild, great grandchild, etc.) of one of these relatives.
• The child must have lived within your home for more than six months during the tax year.
• The child needs to be younger than you.
• As of the end of the tax year, the child must be under 19 if he is not a student, or under 24 if he is a full-time college student.
• The child must not have paid for more than half of his living expenses during the tax year.

Heather can be claimed as a qualifying child as she satisfies all the criteria as follows:

• She is the daughter of Reba
• She is under age 24 , also younger than Reba and a full- time student
• Heather had the same principal residence as Reba for the entire year.
• Heather did not provide more than half of her own support.

In the given case Reba is unmarried for the tax year as she has been divorced for the past four years, she pays for more than the half of the household expenses and her daughter Heather also satisfies all the criteria of being claimed as a qualifying child. Therefore Reba is allowed to file her return as the head of the household.

(c) Reba's has salary of $ 38,200 which is within the the social security wage base of $ 128,400. Therefor Reba's entire salary will be subject to FICA taxes. She will pay 7.65% of her salary i.e 7.65% of 38200 that amounts to $2922 as FICA taxes. Consequently her employer would have also withheld an equal amount of FICA taxes during the year

(d) Heather will be liable to pay kiddie tax as she is aged below 24, a full time student and her unearned income exceeds $ 2100

Description	Amount($)	Explanation
(1) Scholarship	0	as used for tution so excluded from income
(2) Interest income	6580	unearned income
(3) Standard deduction	1050	Greater of (a) $ 1050 or (b) earned income + 350 i.e 0+350
(4) Taxable income	5530
(5) Kiddie tax unearned income threhold to be taxed at regular rate for single taxpayers	2100
(6) Balance income to be taxed as per slab rates for trusts and estates	3430	(5) - (6)
(7) regular rate for single taxpayers	10%
(8) Tax on unearned income threshhold	210	(5) x (7)
(9) Tax on balance income	466	(a) On the first $2550 taxed at 10% = $ 255 (b) On the balance $880 ( 3430-2550) taxed at 24%=$ 211
(10) Total tax of heather	676	(8) + (9)
(11) tax prepayment	1000
(12) Tax refund	324	(11) - (10)