Deduction of Taxes. Joyce is a single, cash-method taxpayer. On April 11, 2009,

Question

Deduction of Taxes. Joyce is a single, cash-method taxpayer. On April 11, 2009, Joyce
paid $120 with her 2008 state income tax return. During 2009, Joyce had $1,600 in state
income taxes withheld. On April 13, 2010, Joyce paid $200 with her 2009 state tax
return. During 2010, she had $2,100 in state income taxes withheld from her paycheck.
Upon filing her 2010 tax return on April 15, 2011, she received a refund of $450 for
excess state income taxes withheld. Joyce had total AGI in 2010 and 2011 of $51,000 and
$53,500, respectively. In 2010, Joyce also paid $3,500 in qualified residence interest.
a. What is the amount of state income taxes Joyce may include as an itemized deduction
for 2009?
b. What is the allowed itemized deduction for state income taxes for 2010?
c. What is her taxable income for 2010?
d. What is her AGI for 2011?
I:7-41 Assume the same facts as Problem I:7-40, but change the amount of Joyce

Explanation / Answer

a. What is the amount of state income taxes Joyce may include as an itemized deduction for 2009? She can include what she paid in 2009, which is the $1,600 withheld and the $120 she paid in 2009 that were for 2008 taxes. 1,600 + 120 = $1,720 Answer: $1,720 b. What is the allowed itemized deduction for state income taxes for 2010? She can include the $2,100 withheld in 2010 and the $200 that was paid in 2010 for her 2009 state tax. 2,100 + 200 = $2,300 Answer: $2,300 c. What is her taxable income for 2010? Her itemized deductions = 2,300 + 3,500 = 5,800. Personal exemption = 3650 Taxable income = 51,000 – 5800 – 3650 = $41,550 d. What is her AGI for 2011? $53,500 --- The problem already states her AGI in 2011 is $53,500. You should know that this AGI should include the state refund received in that year but only to the extent that the state taxes taken as itemized deductions reduced her income tax liability in the previous year, which would be $100, since her itemized deductions for that year only exceeded the standard deduction by $100. So what this all means is that $100 of the refund received in 2011 for the 2010 state taxes would have been included in her income for 2011.

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