Question

Reba Dixon is a fifth-grade school teacher who earned a salary of $38,000 in 2018. She is 45 years old and has been divorced for four years. She receives $1,200 of alimony payments each month from her former husband (divorced in 2016). Reba also rents out a small apartment building. This year Reba received $50,000 of rental payments from tenants and she incurred $19,500 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 $2,010 to move their personal belongings, and she and Heather spent two days driving the 1,426 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 $3,000 partial tuition scholarship this year, and Reba helped out by paying the remaining $500 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 $5,800 in state income taxes and $12,500 in charitable contributions during the year. She also paid the following medical-related expenses for herself and Heather:

Insurance premiums	$	5,795
Medical care expenses	$	1,100
Prescription medicine	$	350
Nonprescription medicine	$	100
New contact lenses for Heather	$	200

Shortly after the move, Reba got distracted while driving and she ran into a street sign. The accident caused $900 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 $2,000 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: $2,200 of interest income from corporate bonds and $1,500 interest income from City of Denver municipal bonds. Overall, Reba’s stock portfolio appreciated by $12,000 but she did not sell any of her stocks.

Heather reported $6,200 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.)

    

Answer 1

Computation of Reba’s federal income taxes

S.No	Description	Amount($)	Explanation
	Gross income:
	Salary income	38000
	Alimony	14400	$1200*12months
	Rental reciepts	50000
	Disability insurance payment recieved	1200	$2000* 60% will be taxable as 40% is paid by Reba herself and is therefore excluded
	Interest income from corporate bonds	2200
	Interest income from muncipal bonds	0	It is exempt from tax
1	Gross total income	105800
	Deductions to arrive at AGI:
	Rental expenses	19500
	Moving expenses	0	Not allowed as deduction from 2018
2	Total deductions to arrive at AGI	19500
3	AGI	86300	[1-2]
	Itemized deductions
	Medical expenses	1072.5	(5795+1100+350+100+200)-7.5% of 3 =7545-6472.5
	Casualty loss	0	cannot be claimed from 2018
	State income tax	5800
	Charitable contribution	12500
4	Total itemized deduction	19373
5	Standard deduction	18000	Head of household limit [see Note]
6	Greater of itemized or standard deduction	19373	Greater of 4 or 5
7	Total deduction	19373
8	Taxable income	66927	[3-7]
9	Tax on taxable income	9272	5944 +22%(66927-51800)
10	Credit	500	tution fee paid on heathers behalf. Due to age of heather being above 17 not eligible for child tax credit
11	Tax prepayment	10000	Withheld
	Tax refund	1228	(9)-(10)-(11)

Note: Reba can claim Heather as a dependent and therefore qualifies as head of household.

Analysis of whether Reba can claim Heather as dependent

Relationship - daughter

Age - under age 24 and a full time student

Residence - she has same principle place of residence as Reba and resides with her for the entire year

Support- Heather did not provide more than half of her own support.

As she satisfies all the above condition Heather is a dependent