Problem 10-37 (LO. 2, 3, 4, 5, 7, 8) Bart and Elizabeth Forrest are married and have no dependents. They have asked you...
Problem 10-37 (LO. 2, 3, 4, 5, 7, 8)
Bart and Elizabeth Forrest are married and have no dependents. They have asked you to advise them whether they should file jointly or separately in 2019. They present you with the following information:
|
If they file separately, Bart and Elizabeth will split the real estate tax and mortgage interest deductions equally.
If an amount is zero, enter "0". Do not round your intermediate tax computations but round your final tax answers to the nearest dollar. Round all other computations to the nearest dollar.
Complete the comparison table through AGI, then compute the total amount of the itemized deductions on the separate schedule before completing the remainder of the table.
Homework Answers
Answer -
Step - ( 1 ) - Information Given -
Bart and Elizabeth Forrest are married and have no dependents.
Following information of 2019.
| Bart | Elizabeth | Joint | |
| Salary (Bart) | $38000 | - | - |
| Salary (Elizabeth) | - | $110000 | - |
| Interest income | $400 | $1200 | $2200 |
| Deductions for AGI | $2400 | $14000 | - |
| Medical expenses | $10427 | $3358 | - |
| State income tax | $900 | $11800 | - |
| Real estate tax | - | - | $5800 |
| Mortgage interest | - | - | $4200 |
| Unreimbursed employee expenses | $1200 | - | - |
If they file separately, Bart and Elizabeth will split the real estate tax and mortgage interest deductions equally.
.
Step - ( 2 ) - Computation of Separate and Joint Tax liability -
| Particulars | Amount in ( $ ) | |||
| Bart | Elizabeth | Joint | ||
| A. | Salary | 38000 | 110000 | 148000 |
| B. | Interest income | 400 | 1200 | 1600 |
| C. | Gross income ( A + B ) |
38400 [ 38000 + 400 ] |
111200 [ 110000 + 1200 ] |
149600 [ 148000 + 1600 ] |
| D. | Deductions for AGI | 2400 | 14000 | 16400 |
| E. | Adjusted Gross Income ( C - D ) |
36000 [ 38400 - 2400 ] |
97200 [ 111200 - 14000 ] |
133200 [ 149600 - 16400 ] |
| F. |
Total Itemized deductions or Standard deduction |
12727 [ refer working note - (1) for calculation ] |
12200 [ because standard deduction of $12200 (as per federal income tax) is more than the Itemized deductions of $12100 ( as per working note -(1)] |
24400 [ because standard deduction of $24400 (as per federal income tax) is more than the Itemized deductions of $21027 ( as per working note -(1)] |
| G. | Taxable Income ( E - F ) |
23273 [ 36000 - 12727 ] |
85000 [ 97200 - 12200 ] |
108800 [ 133200 - 24400 ] |
| H. | Tax Liability [ refer working note - (2) for calculation ] | 2599 | 14575 | 15653 |
# Working note -(1) - Calculation of Amount deductible on Schedule A as an Itemized Deductions -
| Particulars | Reasons / Remarks / Calculations | Amount in ( $ ) | ||
| Bart | Elizabeth | Joint | ||
| Medical expenses | Qualified medical expenses that are more than 10 % of Adjusted gross income are allowed for tax deduction. |
6827 [ $10427 - ( 10% * $36000 )] |
0 [ $3358 - ( 10% * $97200 )] |
6827 |
| State income tax and Real estate tax | Deduction is allowed up to $10000, for a combination of State income taxes and Real estate taxes. |
3800 [ $900 + ( $5800 / 2 )] |
10000 ( Deduction is allowed for maximum $10000 ) |
10000 ( Deduction is allowed for maximum $10000 ) |
| Mortgage interest | Mortgage interest is distributed equally as per instruction given in question ( $4200 / 2 ) = $2100. | 2100 | 2100 | 4200 |
| Unreimbursed employee expenses | Not allowed for Deductions as per federal income tax law. | 0 | 0 | 0 |
| Total Itemized Deductions | 12727 | 12100 | 21027 | |
# Working note -(2) - Calculation of Tax liability -
| Tax Rate | Taxable Income ( $ ) | Amount ( $ ) | |||
| Married, filing separately | Married, filing jointly | Bart | Elizabeth | Joint | |
| 10% | 0 - 9700 | 0 - 19400 |
970 [ 9700 * 10% ] |
970 [ 9700 * 10% ] |
1940 [ 19400 * 10% ] |
| 12% | 9701 - 39475 | 19401 - 78950 |
1628.76 [( 23273 - 9700 ) * 12% ] |
3573 [( 39475 - 9700 ) * 12% ] |
7146 [( 78950 - 19400 ) * 12% ] |
| 22% | 39476 - 84200 | 78951 - 168400 | - |
9839.5 [( 84200 - 39475 ) * 22% ] |
6567 [( 108800 - 78950 ) * 22% ] |
| 24% | 84201 - 160725 | 168401 - 321450 | - |
192 [( 85000 - 84200 ) * 24% ] |
- |
| Tax Liability | 2599 [ rounded off ] | 14575 [ rounded off ] | 15653 | ||
.
Step - ( 3 ) - Calculation of Savings from Filing Jointly -
| Particulars | Amount ( $ ) |
| Tax on Filing separately ( $2599 + $14575 ) | 17174 |
| Tax on Filing jointly [ refer working note - (2) for calculations ] | 15653 |
| Savings from Filing jointly ( $17174 - $15653 ) | 1521 |
.
Step - ( 3 ) - Conclusion -
Bart and Elizabeth should File jointly in 2019, because by filing jointly they can save amount of $1521 .
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