Question

Earned and Unearned Income, Transfers from Others (LO. 3)

Elwood had to retire early because of a job-related injury. During the current year, he receives $9,200 in Social Security benefits. In addition, he receives $6,400 in cash dividends on stocks that he owns and $7,800 in interest on tax-exempt bonds. Assuming that Elwood is single, what is his gross income if

a. he receives no other income? $______

b. he also receives $10,700 in unemployment compensation? $_______

c. he sells some land for $79,900 and he paid $44,100 for the land? $______

Answer 1

a)

Elwood's gross income before considering the taxability of the Social Security benefits is $6,400; the interest is excluded from gross income. None of the $9,200 of Social Security benefits are taxable because his modified adjusted gross income is less than the $25,000 base amount. Elwood must include the lesser of:

1. 0.5 x ($9,200) = $4,600

or

2. 0.5 x ($6,400 + $7,800 + $4,600 - $25,000) < 0

b)

Elwood's gross income increases by the receipt of the unemployment compensation to $17,100 ($6,400 + $10,700). He must include $2,500 of the Social Security in gross income.

1.    0.5 x ($9,200) = $4,600

or

2.    0.5 x ($6,400 + $10,700 + $7,800 + $4,600 - $25,000)

      0.5 x ($4,600) = $2,300

        Elwood's gross income is $19,400 ($6,400 + $10,700 + $2,300). Because his modified adjusted gross income of $29,500 is less than $34,000, the 2nd tier inclusion rule does not apply.

c)

Elwood's gross income is $42,200 [($79,900 - $44,100) + $6,400]. His modified adjusted gross income increases to $54,600 ($42,200 + $7,800 + $4,600) and he becomes subject to the 2nd tier inclusion rule. Under the first tier inclusion rule, Elwood would include $4,600 of the Social Security benefits in his gross income. The lesser of:

1.    0.5 x ($9,200) = $4,600

or

2.    0.5 x ($42,200 + $7,800 + $4,600 - $25,000) = $14,800

        Under the 2nd tier inclusion rule, $7,820 of the Social Security benefits are included in his gross income:

The lesser of:

1.    85% x $9,200                                                           $   7,820

or

2.    The sum of:

a. 85% x ($54,600 - $34,000)                   $ 17,510

b. the smaller of

           i.        $4,600

           ii.       $4,500                                            4,500               $ 22,010

Elwood's gross income is $50,020 ($6,400 + $35,800 + $7,820)