Question

Daniel, age 38, is single and has the following income and expenses in 2016.

Salary income $60,000
Net rent income 6,000
Dividend income 3,500
Payment of alimony 12,000
Mortgage interest on residence 4,900
Property tax on residence 1,200
Contribution to traditional IRA 5,000
Contribution to United Church 2,100
Loss on the sale of real estate (held for investment) 2,000
Medical expenses 3,250
State income tax 300
Federal income tax 7,000
a. Calculate Daniel's AGI.
b. Should Daniel itemize his deductions from AGI or take the standard deduction? Explain.

Answer 1

Answer: See Explanation

Step-by-step explanation:

A. Calculate Daniels AGI

To calculate Daniel's AGI, we have to get his gross income first which will be:

=

Salary income + Net rent + Dividend income

= $60,000 + $6000 + $3500

= $69500

His deductions FOR AGI will be calculated as:

Alimony paid = $12,000

Contribution to traditional IRA = $5,000

Loss on sale of real estate = $2,000 Deduction for AGI = ($19,000)

Adjusted gross income will now be:

= $69500 - $19000

= $50,500

b. Should Daniel itemize his deductions from AGI or take the standard deduction? Explain.

The itemized deductions include:

Mortgage interest on residence = $4,900

Add: Property tax on the residence = $1,200

Add: Contribution to United church = $2,100

Add: State income tax = $300

Total itemized deductions = $ 8,500

Since the total itemized deductions is $8,500 and the deduction for AGI is $19000, he should therefore itemize his deductions as it is cheaper.