Problem 6-34 (Algorithmic) (LO. 1) Daniel, age 38, is single and has the following income and…
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Question “Problem 6-34 (Algorithmic) (LO. 1) Daniel, age 38, is single and has the following income and…”
Answer
(a) — You can classify the expenses below as “Deductible for AGI”, ‘Deductible from AGI’, or “Not deductible”.
Answer
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Particulars | |
Alimony payments | Not Deductible |
Hypothecary interest on a residence |
Deductible From AGI |
Tax on property |
Deductible From AGI |
Contributions to a traditional IRA (assuming the amount is fully deductible). |
Deductible For AGI |
Contribution to the United Church |
Deductible From AGI |
Loss on real estate sales (held as investment). |
Deductible For AGI |
Medical expenses |
Deductible From AGI |
Income tax in the state |
Deductible From AGI |
Federal income tax | Not Deductible |
What’s Daniel’s gross and adjusted income?
Answer
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Particulars | Explanation | Amount ($) | |
I. | Gross income | Salary income + Net rental income + Dividend income = $141000 + $21500 + $2500 | 165000 |
II. | AGI | Gross income – (Contribution of traditional IRA + Loss from sale of real property) = $165000 – ($1500 + $2075) | 161425 |
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(b) — Should Daniel itemize deductions from his AGI or use the standard deduction?
Answer
–
Since Daniel’s total itemized deductions after any limitations are (Refer to working note – (1)), it would be a benefit for him to itemize his deductions using AGI.
.
# Working note
– (1) – Calculation of Itemized deductions –
Particulars | Explanation | Amount ($) | |
I. | Hypothecary interest on a residence | Given in question | 8300 |
II. | Property Tax on Residence | Given in question | 3000 |
III. | Contribution to the United Church | Given in question | 1500 |
IV. | State Income Tax | Given in question | 1800 |
V. | Medical expenses | Tax deductions are available for medical expenses exceeding 10% of adjusted gross income | 0 |
Total itemized deductions | I + II + III+ IV + V | 14600 | |
Conclusion
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