Question

Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Janine, Michael, and Candice). The couple received salary income of $100,000, qualified business income of $10,000 from an investment in a partnership, and they sold their home this year. They initially purchased the home three years ago for $200,000 and they sold it for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions, and they had $3,550 withheld from their paychecks for federal taxes. They are also allowed to claim a child tax credit for each of their children. However, because Candice is 18 years of age, the Jacksons may claim a child tax credit for other qualifying dependents for Candice. (2018)

Question: What is the Jackson's taxable income, and what is their tax liability or (refund)?

Answer 1

1. Gross income = 100,000 (Salary income. Gain on house sale of 50,000 is excluded.)
2. For AGI deductions = 0
3. Adjusted gross income   = 100,000    (1) – (2)
4. Standard deduction = 24,000 (Married filing jointly);
5. Itemized deductions = 16,500
6. Greater of standard deductions or itemized deductions = 24,000    [Greater of (4) or (5)]
7. Qualified business income deduction = 2,000
8. Taxable income = 74,000 [(3) – (6) – (7)]
9. Income tax liability = 8,499 (74,000 – 19,050) × 12% + 1,905 (see tax rate schedule for married filing jointly).
10. Other taxes = 0
11. Total tax = 8,739 [(9) + (10)]
12. Credits = (6,500) [Child credits for three children (3 ×2,000) + Family tax credit for Candice (500)]
13. Prepayments = (3,550)
14. Tax (refund) with return = (1,551) [(11) + (12) + (13)]