Amber & Bryan (both age 45), are married and file a joing tax return. 2017 incom
ID: 2581847 • Letter: A
Question
Amber & Bryan (both age 45), are married and file a joing tax return. 2017 income includes:
1. Salary of $200,000
2. Amber was in a car accident and received compensatory damages of $25,000 for broken nose.
3. Amber also received punitive damages of $15,000; the person who hit her car was intoxicated
4. interest income from Disney bonds in the amount of $1,000
5. refund of 2016 NJ IncomeTaxes of $2,000 (the couple itemized their deductions in 2016; itemized deductions exceeded the standard deduction by $5,000)
Amber and Bryan also incurred and paid the following expenses during the year:
6. Medical expenses: $7,000
7. Parking tickets $300
8. Alimony (Bryan was previously married and pays Alimony to his ex-wife): $12,000
9. Legal fees associated with divorce proceedings- not tax related: $4,000
10. Charitable contributions- paid on 12/30/17: $2,000
11. Casualty loss (after $100 floor, but before any further limitations) $1,000
12. Mortgage payment on principal residence: principal only: $10,000
13. Mortgage payment on principal residence: interest expense: $14,500
14. Property taxes (real estate taxes) on personal residence: $4,200
15. Nephew, Gerardo, owns a home and could not make his property tax payment as he is unemployed. Amber paid Gerardo's property taxes (real estate taxes): $3,000
16. Federal income tax withheld: $18,000
17. Qualified Moving expenses in conjuction with a new job: $2,000
18. Contribution to a traditional IRA: $4,000
19. Cost of new roof on personal residence: $14,000
20. NJ income tax withheld: $1,300
A. Identify items 1-5 as taxable or not taxable. Identify items 6-20 as a deduction for AGI, deduction from AGI, or not deductible. Give a sentence or two explaining limitations, rules, etc for the following items: 5, 6, 10, 11, 15,19
B. Use the tax formula to provide a detailed calculation of the couple's 2017 taxable income. Be sure to compare the standard deduction amount to total itemized deductions.
Explanation / Answer
1. Salary of $200,000 - Is Taxable
2. Amber was in a car accident and received compensatory damages of $25,000 for broken nose - Compensatory damage is tax free for future medical bills
3. Amber also received punitive damages of $15,000, the person who hit her car was intoxicated - Punitive damage is a taxable
4. interest income from Disney bonds in the amount of $1,000 - all the interest received are taxable except from municipal bonds
5. refund of 2016 NJ Income Taxes of $2,000 (the couple itemized their deductions in 2016; itemized deductions exceeded the standard deduction by $5,000) - Taxable to the extent of itemized deduction
6. Medical expenses: $7,000 - Is deductable not exceeding 10% of AGI
7. Parking tickets $300- Deductable for AGI only for business purpose
8. Alimony (Bryan was previously married and pays Alimony to his ex-wife): $12,000 - Alimony is a tax deduction for the payer, hence deductable in AGI
9. Legal fees associated with divorce proceedings- not tax related: $4,000 - Not deductable in AGI
10. Charitable contributions- paid on 12/30/17: $2,000 - Deductable in AGI
11. Casualty loss (after $100 floor, but before any further limitations) $1,000 - Is deductable in AGI subject to losses relating to home
12. Mortgage payment on principal residence: principal only: $10,000 -
13. Mortgage payment on principal residence: interest expense: $14,500 - - Home mortgage interest deduction is limited to the interest on the part of your home mortgage
14. Property taxes (real estate taxes) on personal residence: $4,200 - Deductable in AGI
15. Nephew, Gerardo, owns a home and could not make his property tax payment as he is unemployed. Amber paid Gerardo's property taxes (real estate taxes): $3,000 - Not deductible in AGI
16. Federal income tax withheld: $18,000 - Deductible in AGI
17. Qualified Moving expenses in conjuction with a new job: $2,000 - Deductible in AGI
18. Contribution to a traditional IRA: $4,000 - Deductible in AGI
19. Cost of new roof on personal residence: $14,000 - Deductible in AGI
20. NJ income tax withheld: $1,300 -
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