Question

The chungs are married with one dependent child. They report the following information for 2023: Schedule C net profit $66,650, interest income from certificate of deposit (CD) $2,100, self-employment tax on Schedule C net profit $9,418, dividend eligible for 15% rate $12,000, Lila Chung's salary from Brants Company $75,000, dependent care credit $500, itemized deductions $31,000. Compute AGI, taxable income, and total tax liability (including self-employment tax). Assume that Schedule C net profit is qualified business income (non-service income) under section 199A. Assume the taxable year is 2023. Use individual tax rate schedules and standard deduction table.

Answer 1

The Chungs' AGI is calculated by totaling income sources and subtracting half the self-employment tax. Taxable income is AGI minus itemized deductions. Total tax liability includes federal income tax on taxable income, self-employment tax, and credits.

Step-by-step explanation:

The calculation of taxable income and tax liability for the Chungs involves several steps. First, we need to calculate their Adjusted Gross Income (AGI) by adding up all sources of income. The Chungs have Schedule C net profit of $66,650, interest income from a CD of $2,100, dividend income eligible for 15% rate of $12,000, and Lila Chung's salary of $75,000. This totals $155,750.

Next, we subtract the self-employment tax, which is $9,418 for the Schedule C net profit, to find the AGI. Considering the self-employment tax is partially deductible, we only deduct half of it, which is $4,709, giving us an AGI of $151,041 ($155,750 - $4,709).

For taxable income, we subtract the standard deduction or itemized deductions (whichever is higher) from the AGI. Without specific details on standard deductions for 2023, assuming they haven't changed significantly from previous years, and if the standard deduction is less than their itemized deductions of $31,000, we use the latter. Thus, the taxable income would be $120,041 ($151,041 - $31,000).

The total tax liability will include the federal income tax on the taxable income, the self-employment tax, and any eligible tax credits. We first calculate the self-employment tax, which is already provided at $9,418. To determine federal income tax, we apply the applicable tax rates based on the income brackets and include the eligible dependent care credit of $500. Without the specific tax brackets for 2023, we generalize the calculation by stating that the income will be taxed progressively according to the relevant tax brackets.