Question

John (age 66) and Mary (age 59) Smith are married and file a joint federal tax return.  They have 2 dependent children in college ages 20 & 22.  John and Mary have the following information for 2019:

Income:

John’s Salary                                          $ 120,000

Mary’s Salary                                          $   80,000

Interest Income from taxable bonds        $     8,000

Proceeds from a life insurance policy      $   50,000

         (John’s aunt passed away)

Deductions:

Alimony paid to Mary’s ex-spouse           $   25,000

  (pre 1/1/19 divorce)

Itemized deductions

         Charitable donations                      $     5,000

         NJ State Income Tax                     $   11,000

         Real Estate Taxes                         $     9,000

John had $ 19,500 in federal withholding tax withheld from his pay, while Mary had 12,000 withheld.

A – Calculate the Smith’s 2019 Gross Income.

B - Calculate the Smith’s 2019 AGI.

C – Calculate the Smith’s 2019 Taxable Income

D – Calculate the Smith’s refund or balance due

Answer 1

To claim deduction for Dependent Children the child should be a " Qualifying Child".

To be classified as a Qualifying Child one must fulfill all the following conditions:-

(a) They should be related to you

(b) They meet the age requirement

(c) You should financially support them

(d) They should live with you

(e) You should be the only person claiming them i.e. this rule applies to divorced parent which is not the case here, as Mary is married.

Therefore since the Fifth case is not fulfilled, hence deduction for Dependent Children cannot be taken.

(A) Calculation of Smith's 2019 Gross Income:-

John's Salary $ 120,000

Mary's Salary $ 80,000

Interest Income from Taxable Bonds $ 8,000

Proceeds from Life Insurance Policy $ 50,000

GROSS INCOME $ 258,000

(B) Smith's 2019 AGI:-

AGI = Gross Income - Deductions

Here AGI is $ 258,000 since mary cannot deduct any expense paid as Alimony for Divorce as no expenses paid as  maintenance made under a divorce agreement executed after 2018 is allowed.

(C) Smith's Taxable Income:-

Adjusted Gross Income (AGI) $ 258,000

Less:- Itemized Deductions $ 25,000

OR

Standard Deduction (Since Filing Jointly) $ 24,400

(Whichever is higher)

Itemized Deduction :-

(a) Charitable Donations $ 5000

(b) N J State Income Tax $ 11000

(c) Real Estate Taxes $ 9000

Total Itemized Deductions $ 25000

Higher being $ 25,000

TAXABLE INCOME $ 233,000

(D) Calculation of Tax:-

Since married & filing Jointly

upto 19,400 @ 10% = 1940

from 19,400 to 78,950 @ 12% = 7146 [( 78950-19400)* 12%]

from 78950 to 168400 @ 22% = 19,679 [ (168400-78950) * 22%]

from 168400 to 233000 @ 24% = 15,504 [ (233000-168400) * 24%]

Total Tax 44,269

Less:- Withheld tax (19500+ 12000) 31,500

Balance Tax Payable   12,769