Question

Alfred E. Old and Beulah A. Crane, each age 42, married on September 7, 2016. Alfred and Beulah will file a joint return for 2018. Alfred's Social Security number is 111-11-1112. Beulah's Social Security number is 123-45-6789, and she adopted "Old" as her married name. They live at 211 Brickstone Drive, Atlanta, GA 30304.

Alfred was divorced from Sarah Old in March 2016. Under the divorce agreement, Alfred is to pay Sarah $1,250 per month for the next 10 years or until Sarah's death, whichever occurs first. Alfred pays Sarah $15,000 in 2018. In addition, in January 2018, Alfred pays Sarah $50,000, which is designated as being for her share of the marital property. Also, Alfred is responsible for all prior years' income taxes. Sarah's Social Security number is 123-45-6788.

Alfred's salary for 2018 is $150,000, and his employer, Cherry, Inc. (Federal I.D. No. 98-7654321), provides him with group term life insurance equal to twice his annual salary. His employer withheld $24,900 for Federal income taxes and $8,000 for state income taxes. The proper amounts were withheld for FICA taxes.

Beulah recently graduated from law school and is employed by Legal Aid Society, Inc. (Federal I.D. No. 11-1111111), as a public defender. She receives a salary of $42,000 in 2018. Her employer withheld $7,500 for Federal income taxes and $2,400 for state income taxes. The proper amounts were withheld for FICA taxes.

Alfred and Beulah had interest income of $500. They receive a $1,900 refund on their 2017 state income taxes. They itemized deductions on their 2017 Federal income tax return (total of $15,000). Alfred and Beulah pay $4,500 interest and $1,450 property taxes on their personal residence in 2018. Their charitable contributions total $2,400 (all to their church). They paid sales taxes of $1,400, for which they maintain the receipts. Both spouses had health insurance for all months of 2018 and do not want to contribute to the Presidential Election Campaign.

Compute the Olds' net tax payable (or refund due) for 2018. If you use tax forms for your solution, you will need Form 1040 and Schedules A and B (if available).

1040 US Individual Income Tax Retum 2018 Department of the Treasury-Intenal Revenue Service OMB No. 1545-0074 IRS Use Only-Do not write or staple in this space Filing statussingle Married filing jointly Married filing separately Head of household Qualifying widow(er Your first name and initial Alfred E. Last name Old Your social security number Your standard deduction: Someone can claim you as a dependent If joint return, spouse's first name and initial Beulah A You were born before January 2, 1954 You are blind Last name Crane Spouse's social security number 1 23 4 5 6 7 8 9 Spouse standard deduction □Someone can claim your spouse as a dependent □Spou se was born before January 2, 1954 Full-year health care coverage Spouse is blind Spouse itemizes on a separate return or you were dual-status alien Home address (number and street). If you have a P.O. box, see instructions. 211 Brickstone Drive or exempt (see inst.) (see inst.) YouSpouse If more than four dependents, Apt. no. Presidential Election Campaign City, town or post office, state, and ZIP code. If you have a foreign address, attach Schedule 6 Atlanta, GA 30304 Dependents (see instructions): (1) First name see inst. andhere (2) Social security number (3) Relationship to you (4) if qualifies for (see inst.): Last name Child tax credit Credit for other dependents Sign Here Joint return? See instructions. Keep a copy for your records. Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge If the IRS sent you an Identity Protection PIN, enter it here (see inst Your signature Date Your occupation If the IRS sent you an ldentity Protection PIN, enter it here (see inst Spouse's signature. If a joint return, both must sign. Date Spouse's occupation Preparer's name Preparer's signature PTIN Firm's EIN Check if: Paid Preparer 3rd Party Designee □ Self-employed Use OnlyFirm's address Firm's name Phone no. For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11320B Form 1040 (2018)

Answer 1

CUMULATIVE PROBLEMS

59. Gross income

Salary ($150,000 + $40,000) $190,000

Group term life insurance (Note 1) 300

Dividends 2,500

State tax refund (Note 2) 1,900

$194,700

Deductions for adjusted gross income

Alimony paid (Note 3) (15,000)

Adjusted gross income $179,700

Itemized deductions

State income taxes ($8,000 + $2,400) (Note 4) $10,400

Home mortgage interest 4,500

Real estate taxes 1,450

Cash contributions 2,400 (18,750)

Personal and dependency exemptions ($3,900 � 2) (7,800)

Taxable income $153,150

Tax on $153,150 (Note 5) $ 30,023

Less: Tax withheld ($24,900 + $7,500) (32,400)

Net tax payable (or refund due) for 2013 ($ 2,377)

See the tax return solution beginning on page 5-21 of the Solutions Manual.

Notes

(1) Group term life insurance results in gross income for Alfred of $300 as follows:

$300,000 ? $50,000	� $.10 � 12 months = $300
$1,000

(2) Under the � 111 tax benefit rule, Alfred and Beulah must include the $1,900 state tax refund in their gross income. They received a tax benefit from the deduction in 2012.

(3) The $15,000 is deductible alimony. The $50,000 payment is a property settlement and is not deductible by Alfred.

(4) The state income taxes paid of $10,400 exceed the sales taxes paid of $1,400.

(5) The tax liability on taxable income of $153,150 is calculated using the Tax Rate Schedule for married filing jointly (applying the 15% rate for the qualified dividends of $2,500), and the amount is determined as follows:

Tax on dividend income ($2,500 � 15%) $ 375

Tax on remainder of $150,650 ($153,150 � $2,500)

using the Tax Rate Schedule 29,648

$30,023