Question

Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Janine Jr., Michael, and Candice). The couple received salary income of $100,000 and 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 $3,050 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. (Use the tax rate schedules.)

a. What is the Jacksons' taxable income, and what is their tax liability or (refund)? Amount Description (1) Gross income (2) For AGI deductions (3) Adjusted gross income (4) Standard deduction (5) Itemized deductions (6) (7) Deduction for qualified business income (8) Total deductions from AGI (9) Taxable income (10) Income tax liability (11) Other taxes (12) Total tax (13) Credits (14) Prepayments

Answer 1

Solution

Computation of Jacksons' (Tax Refund) / Tax Due for Tax

	Description	Explanation	Amount ($)
(1)	Gross income	Salary income + Qualified business income = $100000 + $10000 Note - Gain on sale of home is excluded.	1,10,000
(2)	For AGI deductions	-	0
(3)	Adjusted gross income	Same as gross income	1,10,000
(4)	Standard deduction	Standard deduction for Married, filing jointly	24,400
(5)	Itemized deductions	Given in question	16,500
(6)	Greater of standard deduction or itemized deductions	Greater of: (4) or (5)	24,400
(7)	Deduction for qualified business income	$10000 * 20%	2,000
(8)	Total Deduction from AGI	($24,400+$2,000)	26,400
(9)	Taxable income	(3) - (8) = $110000 - $26400	83,600
(10)	Income tax liability	Refer working note - (1)	9,972
(11)	Other Tax		0
(12)	Total Tax		9,972
(13)	Child tax credit	$2000 per qualifying child and $500 per qualifying dependent. = ($2000 * 3) + ($500 * 1)	6500
(14)	Tax withholding	Given in question	3,050
Tax Due	(9) - (10) - (11) = $9,972 - $6500 - $3050	422

# Working note - (1) - Computation of Jacksons' Tax Liability -

	Tax Rate	Taxable Income ($)	Calculation	Amount ($)
I.	10%	0 - $19,750	$19750 * 10%	$1,975
II.	12%	$19,750 - $80,250	($80250 - $19750) * 12%	$7,260
III.	22%	$80,250 - $171,050	($83,600 - $80,250) * 22%	$737
Income tax liability	I + II + III	$9,972

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