Linda and Don are married and file a joint return. In 2015, they received $12,00

Question

Linda and Don are married and file a joint return. In 2015, they received $12,000 in Social Security benefits and $35,000 in taxable pension benefits and interest. The applicable two bases for Social Security computations for married filing jointly are $32,000 and $44,000.

a. The couple's adjusted gross income on a joint return is?

b. Don would like to know whether they should sell for $100,000 (at no gain or loss) a corporate bond that pays 8% in interest each year and use the proceeds to buy a $100,000 nontaxable State of Virginia bond that will pay $6,000 in interest each year.

With a 15% marginal tax rate, their after-tax economic income will increase or decease by how much?

c. In the preceding situation (a), if Linda works part-time and earns $30,000, by how much would Linda and Don's adjusted gross income increase?

Explanation / Answer

Answer a. Taxable Soxial Security Benefit            4,500 = 0.5(35000 + 0.50 X (12000) - 32000) Pension benefits, etc          35,000 AGI          39,500 Answer b. The taxpayers' economic income decreased by $2,000 ($8,000 - $6,000), but taxable income decreased by $9,000. However, with a 15% marginal tax rate, their after-tax economic income will decrease by only $650. Decrease in Interest Income 2000 Decrease in tax liablity (15% of 9000) -1350 Decrease in Economic Income 650 Answer c. Lesser of: 1) 0.85 x [$65,000 + 0.5($12,000) - $44,000] = $22,950 Plus smaller of: 0.5($12,000) = $6,000 0.5[$65,000 + 0.5($12,000) - $32,000] = $19,500 $6,000 + 22,950 = $28,950 or 2) 0.85($12,000) = $10,200 Therefore, Linda and Don would be required to include 85% of the social security benefits ($10,200) in their gross income. Inaudible social security benefits $10,200 other income ($35,000 + $30,000) $65,000 AGI $75,200 AGA in a. above ($39,500) Increase in AGI $35,700

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