Question

AC309 Unit 5: Application Assignment – Investments

Millie is a single taxpayer and her 2018 taxable income is $181,205, calculated as follows:

Description	Amount
Employee wages	133,000
Profit from business (Schedule C)	15,000
Ordinary income from partnership (Schedule E)	22,000
Interest income	4,000
Ordinary dividends (total dividends = 9,000)	2,000
Qualified dividends (total dividends = 9,000)	7,000
Short-term capital gain	8,200
Long-term capital gain	6,900
Total Income – Form 1040, Line 6	198,100
Deduction for ½ of self-employment tax	(495)
Adjusted Gross Income – Form 1040, Line 7	197,605
Standard deduction – Form 1040, Line 8	(12,000)
Qualified business income deduction – Form 1040, Line 9	(4,400)
Taxable Income – Form 1040, Line 10	181,205

Ordinary Income Bracket	Tax Calculation
$0 - $9,525	10% of ordinary income
$9,526 - $38,700	$952.50 plus 12% of ordinary income over $9,525
$38,701 - $82,500	$4,453.50 plus 22% of ordinary income over $38,700
$82,501 - $157,500	$14,089.50 plus 24% of ordinary income over $82,500
$157,501 - $200,000	$32,089.50 plus 32% of ordinary income over $157,500
$200,001 - $500,000	$45,689.50 plus 35% of ordinary income over $200,000
$500,001 or more	$150,689.50 plus 37% of ordinary income over $500,000

Instructions

1. Separate Millie’s 2018 taxable income of $181,205 into its ordinary income and preferential income components. Hint – your ordinary income and preferential income amounts should total Millie’s taxable income of $181,205.

Taxable Income	Ordinary Income	Preferential Income
181,205

2. Using the single taxpayer ordinary tax rate brackets on the previous page, compute Millie’s 2018 income tax liability she should report on her 2018 Form 1040, Line 11. Do NOT calculate any self-employment tax, additional Medicare tax or net investment income tax that Millie might also be liable for (these additional taxes would be reported on Schedule 4 and Form 1040, Line 14).

Description	Amount
Tax liability – ordinary income
Tax liability – preferential income
2018 income tax liability (Form 1040, Line 11)

Answer 1

Taxable income	Ordinary income	Preferential income
181205	$167305	$13900

Preferential income = qualified dividends + long term capital gain = 7000+6900 = 13900

Ordinary income = total taxable income -13900 = 181205-13900 = $167305

Description	Amount
Tax liability – ordinary income (32089.50+(32%*(167305-157500)))	$35227
Tax liability – preferential income (13900*15%)	2085
2018 income tax liability (Form 1040, Line 11)	$37312

As taxable income is between $38,700-$426,700, the applicable preferential tax rate is 15%