Question

Tax Computation Problem

John and Mary Jane Diaz are married, filing jointly. Their address is 204 Shoe Lane, Blacksburg, VA 24061. John is age 35, and Mary Jane is age 30. They are expecting their first child in early 2021. John’s salary in 2020 was $105,000, from which $20,800 of Federal income tax and $4,700 of state income tax were withheld. Mary Jane made $52,000 and had $3,000 of Federal income tax and $3,100 of state income tax withheld. The appropriate amounts of FICA tax and Medicare tax were withheld for John and for Mary Jane. John’s Social Security number is 111-11-1111, and Mary Jane’s Social Security number is 123-45-6789.

Both John and Mary Jane are covered by their employer’s medical insurance policies with 80% of the premiums being paid by their employers. The total premiums were $10,000 for John and $6,200 for Mary Jane. Mary Jane received medical benefits of $7,300 under the plan. John was not ill during 2020. Mary Jane paid noncovered medical expenses of $1,300.

John makes child support payments of $15,000 for his son, Rod, who lives with Jill, John’s former spouse, except for two months in the summer when he visits John and Mary Jane. At the time of the divorce, John worked for a Fortune 500 company and received a salary of $225,000. As a result of corporate downsizing, he lost his job.

Mary Jane’s father lived with them until his death in November. His only sources of income were salary of $2,800, unemployment compensation benefits of $3,500, and Social Security benefits of $4,100. Of this amount, he deposited $6,000 in a savings account. The remainder of his support of $9,500, which included funeral expenses of $4,500, was provided by John and Mary Jane.

Other income received by the Diazes was as follows:

Interest on certificates of deposit		$3,500
Share of S corporation taxable income (distributions from the S corporation to Mary Jane were $1,100; assume no wage limitation for qualified business income deduction)		1,500
Award received by Mary Jane from employer for an outstanding suggestion for cutting costs		4,000

John has always wanted to operate his own business. In October 2020, he incurred expenses of $15,000 in investigating the establishment of a retail computer franchise. With the birth of their child expected next year, however, he decides to forgo self-employment for at least a couple of years.

John and Mary Jane made charitable contributions of $8,700 during the year and paid an additional $1,800 in state income taxes in 2020 upon filing their 2019 state income tax return. Their deductible home mortgage interest was $8,200, and their property taxes came to $4,800. They paid sales taxes of $2,000, for which they have receipts. They paid a ticket of $150 that Mary Jane received for running a red light (detected by a red light camera).

Part 1—Tax Computation

Calculate John and Mary Jane’s tax (or refund) due for 2020.

Part 2—Tax Planning

Assume that the Diazes come to you for advice in December 2020. John has learned that he will receive a $40,000 bonus. He wants to know if he should take it in December 2020 or in January 2021. Mary Jane will quit work on December 31 to stay home with the baby. Their itemized deductions will decrease by $3,100 because Mary Jane will not have state income taxes withheld. Mary Jane will not receive the employee award in 2021. She expects the medical benefits received to be $9,000. The Diazes expect all of their other income items to remain the same in 2021. Write a letter to John and Mary Jane that contains your advice, and prepare a memo for the tax files.

Answer 1

Part-1
John and Mary Jane Diaz filing returns jointly
Particulars	Value($)
Salary	105000
Other income
Interest on certificate of deposit	3500
Award	4000
Capital gains	1500
Total income	114000
Adjustments to income
Alimony paid	-15000
Addional income
Unemployment compensation	3500
Social security benefit	4100
	106600
Itemised deductions
Medical expenses	3240
State and local taxes	1800
Charitable contributions	8700
Interest paid	8200
property taxes	4800
Sales taxes	2000
Total itemised deductions	28740
Taxable income	77860
Tax due
10% of 19750	1975
12% of (77860-19750)	6973.2
	8948.2
Federal income tax withheld	20860	limited to tax payable
Tax due	0

Tax planning

Since tax payable in 2020 will be 19061 after adjusting federal tax withheld so he can show the bonus in 2021 returns.