Question

Dorthy who is 55 years old, works as a financial analyst in Capital One bank. Her monthly
salary is $13,000. Dorthy is married to John who is 66 years of age and works as a
salesman for a local car dealership. His monthly salary from the dealership is $8,500 per
month but he has a very flexible schedule so he supplements his salary by accepting an
employment in the evening at a high-end restaurant and earn $3,000 per month.
They have 3 kids (Nancy is 12, Hana is 15, and Joseph is 19 and attending a local
community college). Dorthy has two sisters and three brothers. John has only one sister.
Dorthy and John live in Detroit, Michigan.
Additional information for 2019:
1) They received interest income of $5,000 from their saving account in
Capital one and $3,500 from Municipal bonds.
2) They sold stocks of Facebook for $25,000 (the stocks were purchased in
2016 for $29,000).
3) Dorthy invested $7,800 in an IRA account in JB Morgan while John
invested $9,000 in an IRA account in Vanguard.
4) Dorthy and John paid $60,000 mortgage interest in 2019 for $1,200,000
mortgage loan that was taken on January 1, 2017. The interest rate is 6% on
this mortgage.
5) John paid alimony of $1,500 monthly to his ex-wife, Lori. The divorce
happened in 2015.
6) Dorthy received cash dividends of $3,800 from Amazon stocks on March
20, 2019.
7) Dorthy and John spent $100,000 from their own-pocket on medical
treatment during 2019. Their health insurance company covered only
$400,000 of the total medical cost. Total medical cost is $500,000.
8) Dorthy donated cash $10,500 to her local church.
9) Dorthy’s employer (Capital one) withheld $22,800 for federal income
taxes, $14,700 for state income taxes, and the required amounts for FICA and Medicare from her paychecks.
10)John’s two employers withheld $16,500 for federal income taxes, $10,900
for state income taxes, and the required amounts for FICA and Medicare
from his paychecks.
11)John’s father died on June 1, 2019. John received $500,000 from his
father’s life insurance.

Assume that Dorthy and John file their tax return for 2019 as married filing joint return.
Required: Answer the following question. (Provide detailed answers
for each question and provide justification of how did you reach your
conclusion).

1) Calculate the gross income of Dorthy and John for 2019. Show the items that should be included
or excluded from income of Dorthy and John separately. Show also the total that will be included
in their tax return. Explain how and why.
2) List all the items and the amounts of all possible deductions FOR AGI applicable to Dorthy and
John. Explain how and why.
3) List all the items and the amounts of all possible deductions FROM AGI (itemized Deductions)
applicable to Dorthy and John. Explain how and why.
4) Calculate the taxable income and the gross amount of tax. Show all your calculations.
5) How much Social security and Medicare taxes should have been withheld by each of the three
employers (Capital One, Car Dealership, and High-end restaurant).
6) Given their high level of income, what recommendations would you provide them with on how to
reduce their tax liabilities.

Answer 1

Particulars	Dorthy	John
Income from Salary
Capital One bank	1,56,000
(12*13000)
Car Dealership		1,02,000
(12*8500)
High End Restaurant		36,000
(12*3000)
Total	1,56,000	1,38,000
Income from Other Sources
Interest from Saving bank account	5,000	5,000
Interest from Municipal Bonds	3,500	3,500
Cash Dividends	3,800
Total	12,300	8,500
Income from Capital Gain/(loss)
Loss on sale of facebook shares	-4,000	-4,000
(25000-29000)
Total	-4,000	-4,000
Gross Income for tax return	1,64,300	1,42,500

Particulars	Dorthy	John
Income from Salary
Capital One bank	1,56,000
(12*13000)
Car Dealership		1,02,000
(12*8500)
High End Restaurant		36,000
(12*3000)
Total-A	1,56,000	1,38,000
Income from Other Sources
Interest from Saving bank account	5,000	5,000
Interest from Municipal Bonds	3,500	3,500
Cash Dividends	3,800
Total-B	12,300	8,500
Income from Capital Gain/(loss)
Loss on sale of facebook shares	-4,000	-4,000
(25000-29000)
Total-C	-4,000	-4,000
Subtotal( A+B+C)	1,64,300	1,42,500
Less: Interest on mortgage loan	-30,000	-30,000
Less: Alimony paid (12*1500)		-18,000
Less: Medical Treatment expenses	-50,000	-50,000
Add: Life Insurance amount		5,00,000
Gross Income	84,300	5,44,500

Particulars	Explanation	Dorthy	John
Gross income as calculated above		1,64,300	1,42,500
Less: Cash donated to local church	If you add up your charitable contributions to qualifying organizations for the year and itemize, you may be able to lower your tax bill. You can even deduct the fair market value of items you donate to charity. The good news is that with the new tax act, you can now deduct up to 60% of your AGI—up from 50%. One note, keep a record of every contribution you make in the form of a bank record or a written record or receipt from the charity, including the name of the organization, as well as the amount and date of the contribution.	-	-
Less: Alimony paid	Not allowable from year 2019	-	-
Less: Interest paid on mortage loan	Not allowable because it is allowed only for home loan taken	-	-
Less: State income taxes	You can take a deduction for state and local income, sales and property taxes you paid in 2018. The deduction limit is different though. This deduction is now capped at a combined total deduction of $10,000 or $5,000 if Married Filing Separately.	-10,000	-10,000
AGI		1,54,300	1,32,500
Less: medical expenses		15,430	13,250
(10% of AGI)
Taxable amount		1,38,870	1,19,250

In this case John and Dorthy are filling joint return so the applicable tax rates would be as follows:
Taxable income (USD)	Tax rate (%)
0 to 19,400	10
19,401 to 78,950	12
78,951 to 168,400	22
168,401 to 321,450	24
321,451 to 408,200	32
408,201 to 612,350	35
612,351+	37
Joint income of John and Dorthy is		2,58,120
Tax rate will be		24%
Tax will be		61,949
Medicare & Social Security tax will be calculated as follows:
Particulars	Dorthy	John
Social Security	16,480	16,480
Medicare	4,524	4,002
Total	21,004	20,482
Employee's half	10,502	10,241

Company wise calculation
Capital one	Dorthy
Social Security	16,480
Medicare	4,524
Total	21,004
Employee's half	10,502
High End resturant	John
Social Security	4,464
Medicare	1,044
Total	5,508
Employee's half	2,754
Car Dealership	John
Social Security	12,648
Medicare	2,958
Total	15,606
Employee's half	7,803