Question

Reba Dixon is a fifth-grade school teacher who earned a salary of $38,400 in 2018. She is 45 years old and has been divorced for four years. She receives $1,235 of alimony payments each month from her former husband (divorced in 2016). Reba also rents out a small apartment building. This year Reba received $50,400 of rental payments from tenants and she incurred $19,656 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 $2,080 to move their personal belongings, and she and Heather spent two days driving the 1,440 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 $3,070 partial tuition scholarship this year, and Reba helped out by paying the remaining $570 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 $5,870 in state income taxes and $12,570 in charitable contributions during the year. She also paid the following medical-related expenses for herself and Heather:

Insurance premiums $ 5,865

Medical care expenses $ 1,170

Prescription medicine $ 350

Nonprescription medicine $ 170

New contact lenses for Heather $ 270

Shortly after the move, Reba got distracted while driving and she ran into a street sign. The accident caused $970 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 $2,070 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: $2,270 of interest income from corporate bonds and $1,570 interest income from the City of Denver municipal bonds. Overall, Reba’s stock portfolio appreciated by $12,070 but she did not sell any of her stocks.

Heather reported $6,340 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).

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

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

c 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

d computations and final answer to the nearest whole dollar amount.)

Answer 1

(a) The qualification for filing as head of hosehold are as follows

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

Heather is Reba's qualifying child as she satisfies all the conditions of a qualifying child which is as follows:

• She is her daughter
• She is 20 years old( which means she is under 24 ) and she is a full time student
• Heather has the same principal residence as Reba for the entire year
• Heather did not provide more than half of her own support.

In the above case Reba paid for more than half of the household expenses, she is unmarried for the tax year as she has been divorced since the past 4 years and also Heather satisfies all the conditions to be claimed as her qualifying child. Therefore Reba is allowed to file as head of household

(b) Reba's salary of $38,400 is within the wage base limit of $128,400. Therefore she will pay FICA tax of 7.65% on her total salary of $ 38,400 that amounts to $ 2,938. Consequently her employer would also have withheld an equal amount i.e. $2,938 as FICA taxes

(c) Heather will be subjected to kiddie tax as she is 20 years old, full time student ,has unearned income exceeding the threshhold of $2100 and does not provide more than half her own support. Her taxes due amounts to $ 381 of refund

S.No	Description	Amount($)	Explanation
1	Scholarship	0	as the scholarship money is used for tution so not taxable
2	Interest income	6340	unearned income
3	Gross income or AGI(all unearned)	6340	(1) + (2)
4	Standard deduction	1050	Greater of (a) $1050 or (b) earned income+ 350 (i.e 0+350)
5	Taxable unearned income	5290	(3) - (4)
6	Kiddie tax threshold to be taxed at regular rates for single tax payers	2100
7	Taxable income to be taxed as per slab rates of trust and estates	3190	(5) - (6)
8	regular rates for single tax payers	10%
9	Tax on kiddie tax threshold of $2100	210	(6) x (8)
10	Tax on balance $ 3190 to be taxed as per slab rates of trust and estates	409	(a) on the first $ 2550 @ 10% = $255 (b)on the remaining $ 640 ( 3190 -2550) @ 24% = $ 154
11	Heathers tax liability	619	(9) + (10)
12	Tax prepayments	1000
13	Tax refund	$ 381	(12) - (11)