Show All Components Of Your Work For Partial Credit
Show All Components Of Your Work For Partial Credit Reviewsteven Age
Show all components of your work for partial credit review. Steven (age 40) and Lori (age 39) Post are married. Lori works as a retail manager and Steven is a self-employed architect (he does not qualify for the QBI Deduction) and does not maintain a home office. Their 2020 tax and other information are as follows: Salary – Lori $90,000 Federal income tax withholding on salary $18,000 CT State Income Tax withholding on salary $ 6,000 CT Municipal bond interest $ 2,000 Savings account interest $ 1,500 Inheritance from Steven’s father’s estate $ 7,000 Dividends from RGR, Inc (all are non-qualified) $ 4,000 Interest paid on Lori’s personal car loan $ 2,000 Child support paid to Steven’s ex-wife $10,000 Alimony paid to Steven’s ex-wife. Divorced in 2010 $ 6,000 Qualified Out of Pocket Medical Expenses $ 5,000 Donations to Church $ 2,500 Real Estate Taxes on primary residence $ 5,000 Mortgage interest paid on primary residence (
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To accurately determine the Post couple’s 2020 tax liability, we must systematically analyze their income, deductions, and applicable tax rules for the year 2020. Using the tax formula approach—comprehensively calculating all components involved—allows us to arrive at a precise figure for their net tax liability or refund. The process involves multiple steps, beginning with identifying all sources of income, applying exclusions, calculating gross income, subtracting adjustments to find AGI, and then deducting either standardized or itemized deductions. We will also account for specific deductions relevant to self-employment, as well as any tax credits or additional taxes owed, such as self-employment tax.
1. All Income
Aggregate all income sources for the year:
- Salaries: Lori earns $90,000.
- Interest from municipal bonds: $2,000 (tax-exempt from federal but taxable for state).
- Savings account interest: $1,500.
- Inheritance: $7,000 (generally not taxable for federal income tax).
- Dividends from RGR, Inc.: $4,000 (non-qualified, fully taxable).
- Steven’s business revenue: $60,000.
Total income before exclusions: $90,000 + $2,000 + $1,500 + $7,000 + $4,000 + $60,000 = $164,500.
2. Income Exclusions
Major exclusions include inheritance, which is not taxable, and municipal bond interest, which is tax-exempt for federal purposes. Since municipal bond interest is tax-exempt federally, it is excluded from gross income for federal tax calculation but remains income for state and local taxes.
Inheritance: $7,000 (excludable).
Municipal bond interest: $2,000 (excludable for federal).
Remaining taxable income sources include salaries, interest income, dividends, and Steven's SE income.
Therefore, total excluded income = $7,000 + $2,000 = $9,000.
3. Gross Income (including Steve’s SE profit)
Gross income = Total income – Income exclusions.
Gross income = $164,500 – $9,000 = $155,500.
4. Deductions For AGI
Self-employment income: Steven, revenue of $60,000 with expenses of $15,000, yields net SE income of $45,000.
Adjusted gross income (AGI) is determined after subtracting allowable adjustments. Since the self-employment income is earned, part of it involves deducting the SE expenses.
Self-employment deduction: 50% of SE tax, which is calculated later, but for simplicity, the net SE income ($45,000) is the basis for AGI calculation.
Additional adjustments: For 2020, adjustments may include contributions to a traditional IRA, student loan interest, etc. In this scenario, no such adjustments are provided, so AGI = gross income from all sources after deductions.
5. Adjusted Gross Income (AGI)
AGI = Gross income – adjustments (none in this case, apart from SE deductions which are part of actual calculation). Thus, AGI = $155,500.
6. Itemized Deduction or Standard Deduction Amount
For 2020, the standard deduction for married filing jointly is $24,800.
Itemized deductions include:
- Real estate taxes: $5,000
- Mortgage interest: $8,000
- Charitable donations: $2,500
Total itemized deductions: $15,500, which is less than the standard deduction. Therefore, the Post couple takes the standard deduction: $24,800.
7. Qualified Business Income Deduction
Since Steven does not qualify for the QBI deduction, we do not include it.
8. Taxable Income
Taxable income = AGI – standard or itemized deduction.
Taxable income = $155,500 – $24,800 = $130,700.
9. Income Tax Liability
Calculating tax liability on $130,700 using 2020 tax brackets:
- 10% on first $19,750 = $1,975
- 12% on next ($75,900 – $19,750) = $56,150 * 12% = $6,738
- 22% on remaining ($130,700 – $75,900) = $54,800 * 22% = $12,056
Total income tax liability = $1,975 + $6,738 + $12,056 = $20,769.
10. Self-employment Tax Liability
Net self-employment income = $45,000.
Self-employment tax rate = 15.3% on 92.35% of SE income:
SE taxable amount = $45,000 * 92.35% = $41,557.
SE tax = $41,557 * 15.3% = approximately $6,359.
Deductible part of SE tax = half of $6,359 ≈ $3,179, which reduces AGI in the calculation, but for tax liability, the full $6,359 is considered.
11. Net Tax Due or Refund
Total federal income tax liability = $20,769.
Less withholding ($18,000) plus any refundable credits (none indicated), so net due = $20,769 – $18,000 = $2,769.
Additional self-employment tax liability = $6,359.
Total tax liability = income tax ($20,769) + SE tax ($6,359) = $27,128.
Tax payments (withholding) = $18,000.
Net amount due = $27,128 – $18,000 = $9,128.
Thus, the Post couple owes approximately $9,128 in total taxes for 2020.
Summary of Calculations
- All Income: $164,500
- Income Exclusions: $9,000
- Gross Income: $155,500
- Deductions For AGI: $45,000 (self-employment net income)
- Adjusted Gross Income: $155,500
- Itemized Deduction: $24,800 (standard deduction chosen as higher)
- Taxable Income: $130,700
- Income Tax Liability: $20,769
- Self-employment Tax Liability: $6,359
- Net Tax Due: Approximately $9,128
References
- Internal Revenue Service. (2020). Publication 17, Your Federal Income Tax. IRS.
- IRS. (2020). Schedule SE (Form 1040), Self-Employment Tax. IRS.
- Tax Foundation. (2020). 2020 Tax Brackets & Rates. Tax Foundation.
- CPA Practice Advisor. (2020). 2020 Tax Highlights for Small Business Owners. CPA Practice Advisor.
- United States Department of the Treasury. (2020). 2020 Standard Deduction and Personal Exemption. IRS.
- H&R Block. (2020).2020 Tax Year Guide. H&R Block.
- KPMG. (2020). 2020 U.S. Business & Tax Guide. KPMG.
- PricewaterhouseCoopers. (2020). 2020 Tax Law Changes and Their Impact. PwC.
- Tax Policy Center. (2020). Summary of 2020 Tax Changes. Urban Institute & Brookings Institution.
- Microsoft Excel. (2020). Tax Calculation Templates. Microsoft.