Question

Paul and Donna Decker are married taxpayers, ages 44 and 42, who

file a joint return for Year 1. Paul and Donna have two dependent
children, Larry and Jane, ages 17 and 18.
The couple also claims Paul’s mother Hannah, age 66, as a
dependent. Hannah received $7,500 in tax exempt social security.
The Deckers estimate that they paid $2,500 of their own money to
pay for Hannah’s support and estimate that, although Hannah does
not pay rent, the rental value of her room would be $200 per
month.
Paul sold 300 shares of Acme Corporation stock for $50 per share
on May 3, Year 1. The Deckers had purchased the stock 10 years ago
for $25 per share. They received dividends of $750 on the stock a
month before the sale.
In addition, Paul and Donna had the following items of income
and deduction:
Paul’s salary $250,000

Paul’s federal income tax withheld 56,770

Pauls’ State income tax withheld 8,200

Donna’s salary 56,000

Donna’s federal income tax withheld 6,630

Donna’s state income tax withheld 800

Home mortgage interest paid

(mortgage principle is $600,000) 7,890

Interest on personal auto loan (not deductible) 1,660

Interest on Visa Card (not deductible) 620

Doctor and hospital bills (including $380 for Hannah and $850 for
the children) 9,700

Medical insurance reimbursement 1,430

Prescription drugs 640

Medical insurance premiums 3,810

Real estate taxes paid 8,850

Cash contributions to church 8,500

Value of service to the local library 740

Paul’s unreimbursed employee expenses to attend hotel management
convention (airfare $340, hotel $170, meals $95, registration fee
340) 945
Compute net tax payable or refund due for the Deckers for Year
1. Ignore any credits for which they might be eligible.
1. What is the gain or loss on the sale of Acme Corp. stock? (10
pts)
2. What is Paul and Donna’s AGI? (10 pts)
3. Calculate itemized deductions for the following:

a. Medical expenses (10 pts)

b. SALT deduction (10 pts)

c. Home mortgage interest (10 pts)

d. Charitable contributions (10 pts)
4. Should Donna and Paul use standard deduction or itemized
deduction (10 pts)?
5. What is Paul and Donna’s taxable income? (10 pts)
6. What is the total tax liability? (10 pts)
7. What is the net tax due or refund? (10 pts)

Answer 1

The Deckers' capital gain from the sale of Acme Corp. stock is $7,500. Their AGI is $312,750. Calculations for deductions, taxable income, total tax liability, and net tax or refund require careful consideration of specific deduction rules and tax bracket application.

Step-by-step explanation:

Capital Gains and Adjusted Gross Income Calculations

To calculate the gain or loss on the sale of Acme Corp. stock, we need to subtract the original purchase price from the selling price. The Deckers purchased 300 shares at $25 per share and sold them at $50 per share. The capital gains would be (300 shares x $50) - (300 shares x $25) = $15,000 - $7,500 = $7,500.

The Adjusted Gross Income (AGI) is the total income minus certain deductions. For Paul and Donna, the AGI would be calculated as follows: Paul's salary of $250,000 plus Donna's salary of $56,000 plus the capital gains of $7,500 minus the dividends received of $750. So, the AGI is $250,000 + $56,000 + $7,500 - $750 = $312,750.

Deduction Calculations

Considering that the Deckers have several deductions, we need to examine each category to find the total itemized deductions. They would tally medical expenses, state and local taxes (SALT), home mortgage interest, and charitable contributions. The medical expenses exceed 7.5% of AGI, so deductible medical expenses are calculated by subtracting the 7.5% AGI threshold from the total medical expenses.

The SALT deduction is capped at $10,000, home mortgage interest is deducted at the actual amount of $7,890, and the charitable contributions are deducted at $8,500. The value of service is not a deductible contribution. Therefore, itemized deductions sum up to (medical expenses after 7.5% AGI threshold) + $10,000 (SALT cap) + $7,890 + $8,500.

For taxable income, we subtract the higher of the standard deduction or itemized deductions from the AGI. To find the total tax liability, we need to reference the tax brackets and calculate accordingly. The Deckers would also subtract the federal income tax withheld from their total tax liability to determine if they have a net tax due or a refund.