Question

Comprehensive Problem (Tax Return Problem). David and Doris Kelley were divorced on February 3, 2018. They lived apart during 2018. The divorce decree required David to make the following payments:

a. Transfer full title to their jointly owned family home to Doris. Fair market value of the home is $180,000, basis $150,000 .

b. $1,000 per month mortgage payments on the house, above. The mortgage has 20 years remaining before being fully paid off, but the payments would end on her death.

c. $2,000 per month for 10 years’ support payments to Doris, of which $600 per month is child support.

d. Doris insisted that the children attend private schools. In 2018, David paid $1,500 in tuition for the children’s private high school. David paid his lawyer $5,000 to represent him in the divorce proceedings. David and Doris agreed that Doris would maintain a home for the children. Further, Doris agreed to allow David to claim one child as a dependency exemption. This agreement was put in writing and signed by Doris.

Besides the divorce, David has had a big year financially. He owns an apartment house and he requires each new tenant to place a $750 security deposit with him before moving into the apartment. When the tenant ultimately vacates the apartment, David will refund the deposit. In 2018, David collected $3,750 in security deposits and rental income of $15,000.

David entered a local raffle in 2018. David won first prize, which was a new automobile with a window price of $20,000. He checked with several local car dealers and was positive that if he had purchased a similar car on his own, the price would have been $18,200.

David loaned his sister Lois $5,000. Lois was repaying the loan at $100 per month plus interest of $40. Since Lois was about to depart on an extended vacation on December 2, 2018, she gave David $200 plus interest of $80 to cover the months of December and January.

David has a good job that pays an annual salary of $50,000. In 2018, business was very good and in December 2018 bonuses were announced for the employees. David earned a $4,000 bonus for 2018. Bonuses would be mailed to the employees during the first week of January 2019. David has itemized deductions of $20,000. Determine David’s 2018 taxable income.

Answer 1

Taxable Income of Mr. David for 2018 will be as follows: -

Particulars	Amount (in$)
Income from Capital Gain
a) Transfer of jointly owned home to Ms. Dory (Fair market value $180,000- Base Value $150,000)	30,000
Total Income from Capital Gain	30,000
Income from House Property:
Rental Income: (Note: Security Deposit is not taxable since the landlord has an obligation to return it to the tenanat once he vacates)	15,000
Total Income from House property	15,000
Annual Salary of the assessee	50,000
Bonus declared by the company	4,000
Total Income from Salary	54,000
Income from Other Sources:
Prize received	18,200
Interest earned on loan extended ($40*11+$80)	520
Total Income from Other Sources	18,720
Total Income	117,720
Less Deductions: -
b) Mortgage payment of $ 1,000 per month ($1,000*12)	(12,000)
d) Tuition fees paid for child's school	( 1,500)
Itemized deductions of assessee	(20,000)
Total deductions	(33,500)
Total taxabel income of Mr. David	84,220

Hence the total taxable income of Mr. David for 2018 will be $84,220.

Note: Amount paid for chil's support after divorce is not allowed as a deduction.