Question

Cecil C. Seymour is a 64-year-old widower. He had income for 2018 as follows:

Pension from former employer $39,850

Interest income from Alto National Bank 5,500

Interest income on City of Alto bonds  4,500

Dividends received from IBM stock held for over one year 2,000

Collections on annuity contract he purchased from Great Life Insurance  5,400

Social Security benefits 14,000

Rent income on townhouse 9,000

The cost of the annuity was $46,800, and Cecil was expected to receive a total of 260 monthly payments of $450. Cecil has received 22 payments through 2017. Cecil’s 40-year-old daughter, Sarah C. Seymour, borrowed $60,000 from Cecil on January 2, 2017. She used the money to start a new business. Cecil does not charge her interest because she could not afford to pay it, but he does expect to collect the principal eventually. Sarah is living with Cecil until the business becomes profitable. Except for housing, Sarah provides her own support from her business and $1,600 in dividends on stocks that she inherited from her mother. Other relevant information is presented below: • Expenses on rental townhouse:

Utilities $2,800

Maintenance 1,000

Depreciation 2,000

Real estate taxes 750

Insurance 700

• State income taxes paid: $3,500

• County personal property taxes paid: $2,100

• Payments on estimated 2016 Federal income tax: $5,900

• Charitable contributions of cash to Alto Baptist Church: $6,400

• Federal interest rate: 6%

• Sales taxes paid: $912

Compute Cecil’s 2018 Federal income tax payable (or refund due).

Answer 1

WN-1
Cost of Annuity	$46,800
Monthly Payments	$450
Number of Monthly Payments	260
Exclusion percentage of annuity	40%
contract cecil purchased =cost of
annuity /monthly payments*no of
payments
$46800/($450*260)
Annuity received from group	$5,400
insurance
Annual Exclusion on annuity contract	$2,160
annuity received*exclusion%
$5400*40%
Annuity Payment included in Gross
Income =Annuity Received-Annual exclusion
$5400-$2160	$3,240
WN2
Amount of social security benefits
that included in gross income is
lesser of the following amount
$14000*85%	$11,900
WN3
Interest on gift loan
Cecil made below market loan of
amount $60000 to her daughter
qualifies for $100000 loan exception
earned net income of $1500 from
investment
It must include cecils gross income
instead of $60000*6%(Federal Tax)	$3,600
WN4
Net Rental Income from town house
Rent Income		$9,000
Less Expenses
Utilities	$2,800
Maintenance	$1,000
Real Estate Taxes	$750
Insurance	$700
Depreciation	$2,000
Net Rental Income		$1,750
WN5
Cecil does not qualify for a dependency
deduction as her daughter is independent
	Computation Cecil 2018 Federal income tax payable
Gross Income
pension	$39,850
Interest income	$5,500
dividend income	$2,000
annuity income as WN1	$3,240
Social security benefits as per WN2	$11,900
Imputed interest on gift	$1,600
as per WN3
Net Rental Income	$1,750
as per WN4
Gross Income		$65,840
Deduction for AGI		0
AGI			$65,840
Less:Personal Exemption as per WN5			($3,950)
Less :Itemized Deduction			($13,000)
Taxable Income			$48,890
Tax Liability	$6,676
Less Estimated Tax Payments	($5,900)
Net tax payable or refund for 2018	$776
Calculation of tax liability
Married filing jointly or qualifying
widow /widower 10% upto $18150
15%=18151 to 73800
18150 *10%	$1,815
Taxable Income($48890-$18151)*15%	$4,611
Tax Liability	$6,426
Add tax on dividend income	$250
5%*2000
	$6,676