Cecil C. Seymour is a 64-year-old widower. He had income for 2018 as follows: Pe
ID: 2330297 • Letter: C
Question
Cecil C. Seymour is a 64-year-old widower. He had income for 2018 as follows:
Pension from former employer $39,850
Interest income from Alto National Bank 5,500
Interest income on City of Alto bonds 4,500
Dividends received from IBM stock held for over one year 2,000
Collections on annuity contract he purchased from Great Life Insurance 5,400
Social Security benefits 14,000
Rent income on townhouse 9,000
The cost of the annuity was $46,800, and Cecil was expected to receive a total of 260 monthly payments of $450. Cecil has received 22 payments through 2017. Cecil’s 40-year-old daughter, Sarah C. Seymour, borrowed $60,000 from Cecil on January 2, 2017. She used the money to start a new business. Cecil does not charge her interest because she could not afford to pay it, but he does expect to collect the principal eventually. Sarah is living with Cecil until the business becomes profitable. Except for housing, Sarah provides her own support from her business and $1,600 in dividends on stocks that she inherited from her mother. Other relevant information is presented below: • Expenses on rental townhouse:
Utilities $2,800
Maintenance 1,000
Depreciation 2,000
Real estate taxes 750
Insurance 700
• State income taxes paid: $3,500
• County personal property taxes paid: $2,100
• Payments on estimated 2016 Federal income tax: $5,900
• Charitable contributions of cash to Alto Baptist Church: $6,400
• Federal interest rate: 6%
• Sales taxes paid: $912
Compute Cecil’s 2018 Federal income tax payable (or refund due).
Explanation / Answer
WN-1 Cost of Annuity $46,800 Monthly Payments $450 Number of Monthly Payments 260 Exclusion percentage of annuity 40% contract cecil purchased =cost of annuity /monthly payments*no of payments $46800/($450*260) Annuity received from group $5,400 insurance Annual Exclusion on annuity contract $2,160 annuity received*exclusion% $5400*40% Annuity Payment included in Gross Income =Annuity Received-Annual exclusion $5400-$2160 $3,240 WN2 Amount of social security benefits that included in gross income is lesser of the following amount $14000*85% $11,900 WN3 Interest on gift loan Cecil made below market loan of amount $60000 to her daughter qualifies for $100000 loan exception earned net income of $1500 from investment It must include cecils gross income instead of $60000*6%(Federal Tax) $3,600 WN4 Net Rental Income from town house Rent Income $9,000 Less Expenses Utilities $2,800 Maintenance $1,000 Real Estate Taxes $750 Insurance $700 Depreciation $2,000 Net Rental Income $1,750 WN5 Cecil does not qualify for a dependency deduction as her daughter is independent Computation Cecil 2018 Federal income tax payable Gross Income pension $39,850 Interest income $5,500 dividend income $2,000 annuity income as WN1 $3,240 Social security benefits as per WN2 $11,900 Imputed interest on gift $1,600 as per WN3 Net Rental Income $1,750 as per WN4 Gross Income $65,840 Deduction for AGI 0 AGI $65,840 Less:Personal Exemption as per WN5 ($3,950) Less :Itemized Deduction ($13,000) Taxable Income $48,890 Tax Liability $6,676 Less Estimated Tax Payments ($5,900) Net tax payable or refund for 2018 $776 Calculation of tax liability Married filing jointly or qualifying widow /widower 10% upto $18150 15%=18151 to 73800 18150 *10% $1,815 Taxable Income($48890-$18151)*15% $4,611 Tax Liability $6,426 Add tax on dividend income $250 5%*2000 $6,676
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