Through November, Cameron has received gross income of $120,000. For December, C

Question

Through November, Cameron has received gross income of $120,000. For December, Cameron is considering whether to accept one more work engagements for the year. Engagement 2 will generate $7,000 of revenue at a cost to Cameron of $3,000, which is deductible for AGI. In contrast, engagement 2 will generate $5,000 of qualified business income (QBI) which is eligible for the 20% QBI deduction. Cameron files as a single taxpayer.

a. Calculate Cameron’s taxable income assuming he chooses engagement 1 and assuming he chooses engagement 2. Assume he has no itemized deductions.

Explanation / Answer

Taxable income calculation if Cameron chooses engagement 1

Gross Income $ 120,000

Income from engagement $ 7000

AGI deduction $ 3000

Adjusted gross income = (120,000 + 7,000 - 3,000) = $ 124,000

Standard deductions (2017) = $ 6350

Personal exemption (2017) = $ 4150

Taxable income = 124,000 - (6350+4150) = $ 113,500

Taxable income calculation if Cameron chooses engagement 2

Gross Income $ 120,000

Qualified Business Income $ 5000

QBI deduction 20 % of 5000 = $ 1000

Adjusted gross income = (120,000 + 5,000 - 1,000) = $ 124,000

Standard deductions (2017) = $ 6350

Personal exemption (2017) = $ 4150

Taxable income = 124,000 - (6350+4150) = $ 113,500

Taxable income under engagement 1 and 2 is same. Hence Cameron can select either of the engagement.

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