Question

Samantha is a single individual with no dependents. In 2018, she had total income of $162,000, of which $9,500 is from municipal bond interest. She has FOR AGI deductions of $12,000, itemized deductions of $9,800 and tax credits of $1,200.  She also made estimated tax payments of $25,000. (Hint: Refer to the tax formula for individuals in “Helpful Formulas from the Book” PDF.)

1. Compute Samantha’s taxable income for 2018.
2. Compute Samantha’s tax due for 2018.
3. Assume that Samantha is a C Corporation instead of an individual and all of the deductions are business related. What would the corporation’s tax due be for 2018?

3) Goliath Supplies Inc. (a C Corp) reports total net income of $575,000 in 2018. This includes $25,000 of income from 5.00% Jackson County municipal bonds (muni bond interest is not taxable). Thus, the Corporation’s taxable income is equal to $550,000.

1. What is Goliath’s tax liability for 2018?
2. What are Goliath’s marginal, average and effective tax rates, respectively?
3. If equivalent taxablebonds pay 6.50% interest, what is the implicit tax rate for the Jackson County bonds? (see handout for Implicit Tax Rate)
4. Did Goliath make a good choice to invest in the municipal bonds instead of the taxable bonds?

4) Joe owns a 25% interest in an S Corporation that earned $250,000 in 2018. He also owns 20% of the stock in a C Corporation that earned $400,000 during the year. The S Corporation distributed $50,000 to Joe, and the C Corporation paid dividends of $15,000 to Joe. How much income must Joe report from these businesses on his individual income tax return? (Hint: A C Corporation is a separate taxable entity. An S Corporation is a flow-through entity.)

5) Complete the following table by selecting a response in each box:

Questions	General Partnership	S Corporation	C Corporation
Who pays tax on the entity’s income?	Partners or the Partnership	Shareholders or the Corporation	Shareholders or the Corporation
Are operating losses passed through to owners?	Yes/No	Yes/No	Yes/No
Are capital gains/losses reported on owners’ tax returns as such?	Yes/No	Yes/No	Yes/No
Are distributions of profits taxable to owners?	Yes/No	Yes/No	Yes/No
Is the liability of owners limited?	Yes/No	Yes/No	Yes/No

6) Identify the probable justification (economic, social, equity, political, or simply administrative feasibility) for each of the following provisions of the tax law.

1. A tax credit allowed for electricity produced from renewable resources
2. A tax credit allowed for the purchase of a motor vehicle that operate on alternative energy sources (e.g., nonfossil fuels)
3. Favorable treatment accorded to research and development expenditures
4. The deduction allowed for contributions to qualified charitable organizations
5. An election that allows certain corporations to avoid the corporate income tax and pass losses through to their shareholders

Answer 1

For 2018-2025, the TCJA establishes a new $500 credit for dependents who are not under-age-17 children who qualify for the $2,000 child credit.

For example, qualifying dependents can include: (1) a dependent child who lives with you for over half the year and is over age 16 and up to age 23 if he or she is a student and (2) a host of non-child relatives (grandchild, sibling, stepbrother, stepsister, father, mother, grandfather, grandmother, stepfather, stepmother, niece, nephew, uncle, aunt, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law, and others).

Apparently, these non-child relatives will only qualify for the $500 credit if they have no gross income for the year, because the tax-law language says they cannot have gross income in excess of the dependent exemption deduction amount. For 2018-2025, the dependent exemption deduction is deemed to still exist, but it equals $0. In addition, all these folks would also have to receive over half of their support for the year from you and be a U.S. citizen, U.S. national, or U.S. resident. Individuals who are not relatives can also be qualifying dependents if they meet the preceding requirements and live with you as a member of your household for the year.

Observation: The apparent requirement that non-child dependent cannot have any gross income to be eligible for the $500 credit might be a legislative oversight where the drafter of the provision failed to take into account the fact that the dependent exemption for 2018-2025 is $0. If it’s not an oversight, eligibility for the $500 credit will be a rarity.

Education breaks unchanged, except for 529 plan liberalization

The TCJA leaves all the education-related tax breaks untouched, with one exception: the new law liberalizes the Section 529 plan rules to allow federal-income-tax-free withdrawals of up to $10,000 per year to cover tuition at a public, private, or religious elementary or secondary school. This change is permanent, for qualifying withdrawals made after 12/31/17. However, since 529 plans are operated by states, this pro-taxpayer change may or may not be allowed by your plan.