Question

Paul and Donna Decker are married taxpayers, ages 44 and 42, respectively, who file a joint return for 2018. The Deckers live at 1121 College Avenue, Carmel, IN 46032. Paul is an assistant manager at Carmel Motor Inn, and Donna is a teacher at Carmel Elementary School. They present you with W–2 forms that reflect the following information:

Paul Donna

Salary $68,000 $56,000

Federal tax withheld 6,770 6,630

State income tax withheld 1,400 1,100

FICA (Social Security and Medicare withheld 5,202 4,284

Social Security numbers 111-11-1112 123-45-6789

Donna is the custodial parent of two children from a previous marriage who reside with the Deckers throughout the school year. The children, Larry and Jane Parker, reside with their father, Bob, during the summer. Relevant information for the children follows:

Larry Jane Age       17       18

Social Security numbers 123-45-6788 123-45-6787

Months spent with Deckers      9       9

Under the divorce decree, Bob pays child support of $150 per month per child during the nine months the children live with the Deckers. Bob says that he spends $200 per month per child during the three summer months they reside with him. Donna and Paul can document that they provide $2,000 support per child per year. The divorce decree is silent as to which parent can claim the exemptions for the children.

In August, Paul and Donna added a suite to their home to provide more comfortable accommodations for Hannah Snyder (123-45-6786), Donna’s mother, who had moved in with them in February 2017 after the death of Donna’s father. Not wanting to borrow money for this addition, Paul sold 300 shares of Acme Corporation stock for $50 per share on May 3, 2018, and used the proceeds of $15,000 to cover construction costs. The Deckers had purchased the stock on April 29, 2013, for $25 per share. They received dividends of $750 on the jointly owned stock a month before the sale.

Hannah, who is 66 years old, received $7,500 in Social Security benefits during the year, of which she gave the Deckers $2,000 to use toward household expenses and deposited the remainder in her personal savings account. The Deckers determine that they have spent $2,500 of their own money for food, clothing, medical expenses, and other items for Hannah. They do not know what the rental value of Hannah’s suite would be, but they estimate it would be at least $300 per month.

Interest paid during the year included the following:

Home mortgage interest (paid to Carmel Federal Savings & Loan) $7,890

Interest on an automobile loan (paid to Carmel National Bank) 1,660

Interest on Citibank Visa card 620

In July, Paul hit a submerged rock while boating. Fortunately, he was uninjured after being thrown from the boat and landing in deep water. However, the boat, which was uninsured, was destroyed. Paul had paid $25,000 for the boat in June 2017, and its value was appraised at $18,000 on the date of the accident.

The Deckers paid doctor and hospital bills of $10,700 and were reimbursed $2,000 by their insurance company. They spent $640 for prescription drugs and medicines and $5,904 for premiums on their health insurance policy. They have filed additional claims of $1,200 with their insurance company and have been told they will receive payment for that amount in January 2019. Included in the amounts paid for doctor and hospital bills were payments of $380 for Hannah and $850 for the children. All members of the Decker family had health insurance coverage for all of 2018.

Additional information of potential tax consequence follows:

Real estate taxes paid $6,850

Sales taxes paid (per table) 1,379

Contributions to church 2,600

Appraised value of books donated to public library 740

Refund of state income tax for 2017 (the Deckers itemized on their 2017 Federal tax return) 1,520

Compute net tax payable or refund due for the Deckers for 2018. Ignore the child tax credit in your computations. If the Deckers have overpaid, the amount is to be credited toward their taxes for 2019.

Answer 1

Paul,s salary $ 68000

Donna's salary 56000

Dividends 750

State income tax refund 1520

Long-term capital gain (note 1 ) 7500

Adjusted gross income $133770

Less: Itemized deductions (note 2) (22520)

Less:Persional and dependency exemptions

(Paul, Donna, Larry, Jane, Hannah) (note 3) (20000)   

Taxable income $ 91250

Tax (note 5) $ 13575

Less: Tax withheld($6770+6630) (13400)   

Net tax payable for 2015 $ 175

1. Sale price of 300 shares Acme corp, stock(300 * $50) $ 15000

Cost of stock (300 * $25) (7500)  

Recognized gain on sale (LTCG) $ 7500   

2.Itemized deduction:

Medical expenses:

Doctor and hospital bill ($10,700- $2000) $8700

Prescription drug and medicine 640

Insurance premium 5904  

Total Medical $15244

Less: 10% of $133770 AGI (13377)

Deductiable medical $ 1867

Taxes:

State income tax paid ($900+$800) $ 1700

Real estate taxes 3850 5550

Home mortage intrest 7890

Contributions:

Church $ 1950

Books 740 2690

Casuality loss:

Fair market value $18000

Less: Non deductiable floor (100)

Less: 10% of $133770 AGI (13377) 4523

Miscellaneous itemized deductions:

Airfare $340

Hotel 170

Meals (50% x $95) 48

Reagistration fee 340   

Total deductable items $ 898

Less: 2% of $133770 AGI (2675)

Total itemized deductions $22520

3. Because Donna is the custodial parent, the Deckers qualify for the dependency deduction for both Larry and Jane. Because they provide over 50% of the support of Hannah, they also qualify for the dependency deduction for her, Thus The personal and dependency excmptions are $20000 ($4000 x 5)

4.Consumer interest is not deductable . Therefore, neither the interest on the auto loan of $1660 nor the credit card intrest of $620 is deductable.

5. Tax on $8520* x 15% = $1237.50

74900 = 10312.50

8100 x 25% = 2025.00

$91250 $13575.00

*$750 dividend +$7500 LTCG = $ 8250