Question

Note: This problem is for the 2018 tax year.

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 111-11-1109. Beulah's Social Security number is 123-45-6780, 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. He is an executive working for Cherry, Inc. (Federal I.D. No. 98-7654321). As part of his compensation package, Cherry 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. Alfred and Beulah 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.

Required:

Compute the Olds' net tax payable (or refund due) for 2018. Use Form 1040 and Schedule 1 to complete this tax return.

• It may be necessary to complete the tax schedule and worksheet before completing Form 1040.
• Enter all amounts as positive numbers.
• If an amount box does not require an entry or the answer is zero, enter "0".
• Make realistic assumptions about any missing data.
• When computing the tax liability, do not round your immediate calculations. If required round your final answers to the nearest dollar.
• Use the 2018 Tax Rate Schedule provided. Do not use the Tax Tables.

Answer 1

Gross income
Salary ($150,000 + $42,000) $192,000
Group term life insurance (Note 1) 300
Interest income 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
Standard deduction (greater than itemized deductions) (24,000)
Taxable income $155,700
Tax on $155,700 (Note 4) $ 26,133
Less: Tax withheld ($24,900 + $7,500) (32,400)
Net tax payable (or refund due) for 2018 ($ 6,267)

Notes

(1)

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

$300,000 – $50,000 $1,000 x $.10 ~ 12 months = $300

(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 2017.

(3)

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

(4)

The tax liability on taxable income of $155,700 is calculated using the 2018 Tax Rate Schedule for married filing jointly.