Week 1

Chapter 27 Homework Solutions [Don’t worry for exam purposes]

Intro to Computing Tax Liability

p. 940:

1. T is a calendar year txpr. In each of the following compute T’s tax liability assuming T has
$315,000 of taxable income in 2018.

(a) T is single.

Answer:. T's tax liability under §1(j)(2)(C) is $85,939.50.

$45,689.50 +
$40,250 [35% of $115,000 ($315,000 less $200,000)]

(b) On 12/31/18, T married Spouse who has no income and they file a joint return.

Answer: T's tax liability under §1(j)(2)(A) is $64,179. Under §6013, married individuals
may file a joint return. Under §7703(a)(1) marital status is determined at the end
of the year and therefore T and Spouse may file a joint return.

(c) T was married with two minor children supported by T and Spouse, but Spouse, who had
no income, died on 1/15/18.

Answer: T's tax liability under §1(j)(2)(A) is $64,179. The exception clause of
§7703(a)(1) applies, and T is still treated as married in the year of Spouse's
death. Spouse's executor or administrator and T may file a joint return for the
year of Spouse's death. See § 6013(a)(3).

(d) T was married with two minor children supported by T and Spouse, but Spouse, who had
no income, died on 12/31/17.

Answer: T's tax liability under § 1(j)(2)(A) is still $64,179. In this situation, T is a "surviving
spouse" as defined in §2(a) and T may continue to use the §1(j)(2)(A) rates. The
following requirements of the §2(a) definition of "surviving spouse" are met, viz:

(1) Spouse died in one of the two years immediately preceding the taxable
year; §2(a)(1)(A).

(2) T maintains a household providing over half of the cost of maintenance.

§2(a)(1) (last sentence).

(3) T's household constitutes the principal place of abode for §151
dependents of T who are children of T. The children are qualified
dependents of T under §152(a)(1) for whom T is entitled to claim
deductions under §151(c)(1), although currently under §151(d)(5)(A) the
deduction amount is zero. §2(a)(1)(B)(i) and (ii).
p. 940 [cont.]

(4) It is assumed that none of §2(a)(2) limitations is violated.

(e) T was married with two minor children supported by T and Spouse, but Spouse,
who had no income, died on 12/31/15.

Answer: T's tax liability under § 1(j)(2)(B) is $84,548.

$44,298 +
$40,250 [35% of $115,000 ($315,000 less $200,000).

T is a "head of household" as defined in §2(b), because:

(1) T is not married at the close of the taxable year. § 2(b)(1).

(2) T is not a surviving spouse; see §2(a). As Spouse did not die in
one of the two immediately preceding taxable years, T does not
qualify as a surviving spouse. §2(a)(1)(A).

(3) T maintains a household and provides over half of the cost of

maintenance. §2(b)(1) (last sentence).

(4) T maintains as T's home a household which constitutes the

principal place of abode of T's qualifying children (as defined in
§152(c)) for more than one-half of the year. §2(b)(1)(A)(I).

(5) T does not fall within any of the §2(b)(3) limitations.

(f) T was married with two minor children supported by T and Spouse, but Spouse,
who had no income, died on 12/31/15 and T remarried on 12/31/18 and T and
new Spouse file separate returns.

Answer: T's tax liability under §1(j)(2)(D) is $85,939.50.

$45,689.50 +
40,250 [35% of $115,000 ($315,000 less $200,000)]. Even though T
supports two minor children in T's home, T does not qualify for the
favorable "head of household" rate of §1(j)(2)(B) because T is married
at the close of the taxable year. See §2(b)(1). See also §§1(j)(2)(D) and
7703(a)(1) concerning the time for determining marital status. If,
however, T and New Spouse had lived apart during the entire taxable
year, T could use the §1(j)(2)(B) rates. See §§2© and 7703(b).

(g) T is a trust.

Answer: The trust’s tax liability under §1(j)(2)(E) is $114,936.50.

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p. 940 [cont.]
$3,011.50 +
$111,925 [37% of $302,500 ($315,000 less $12,500)]. Note the
significantly accelerated rates applicable to estates and trusts under
§1(j)(2)(E).

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p. 944

1 Attorney is a married sole practitioner who files a joint return with Spouse. Compute their §199A
deduction in the following:

(a) Atty has $284,000 of gross income from his law practice and $30,000 of business
expenses. Atty and Spouse have $20,000 of dividends and $10,000 of interest income.

Answer: Attorney’s §199A deduction is $50,800. Attorney’s taxable income is $260,000,

$284,000 plus $30,000 of dividends and interest less $30,000 of business expenses
and less a $24,000 standard deduction. See §199A(e)(1). Attorney is in a
specified services trade or business. §199A(d)(2). Since the taxable income is
below the $315,000 threshold amount (§199A(e)(2)(A)), the specified service
trade or business limitation of §199A(d) is inapplicable (§199A(d)(3)) as is the
W-2 wages limitation (§199A(b)(3)(A)). Consequently, the amount of Attorney’s
§199A deduction is computed under §199A(a)(1) and is the lesser of (1) the
(a)(1)(A) combined qualified business income amount or (2) the (a)(1)(B) 20%
of the excess of taxable income over net capital gain. Where there is a single
trade or business, the combined qualified business income amount which does not
include the dividends and interest (§199A(c)(3)(B)(ii) and (iii)), is 20% of the
qualified business income as defined in §199A(c)(1) and (3) of $254,000,
($284,000 less $30,000 of expenses). Thus, the first amount is $50,800 (20% of
$254,000). §199A(b)(2). The second amount is $52,000, 20% of Attorney’s
taxable income (see §199A(e)(1)) $260,000 less net capital gain of zero.
(§199A(a)(2)). Thus, attorney’s deduction is $50,800. Note that the §199A
deduction reduces Attorney’s taxable income to from $260,000 to $209,200. See
§63(a) and (b)(3) allowing the deduction in computing taxable income regardless
of whether a txpr uses the standard deduction or elects to itemize deductions.

(b) Atty has $125,000 of salary income and $30,000 of business expenses. Atty and Spouse
have $20,000 of dividends and $10,000 of interest income.

Answer: Since Attorney is an associate (and not self-employed or a partner in the firm),
Attorney does not have a qualified trade or business and is not allowed a §199A
deduction. See §199A(d)(1)(B).

(c) Atty’s 2 member firm has gross income of $568,000 and $60,000 of business expenses
and he is an equal partner. Atty and Spouse have $20,000 of dividends and $10,000 of
interest income.

Answer: Attorney’s §199A deduction is $50,800. Under §199A(f)(1)(A)(i), the deduction

is computed at the partner=s level and Attorney takes into account Attorney’s
allocable share of items of income, etc. §199A(f)(1)(A)(ii). As a result, Attorney
has $284,000 of gross income and $30,000 of expenses and the computations are
identical to the computations in problem (a), above.

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p. 944 [cont.]

(d) Atty has $500,000 of gross income from his law practice and $30,000 of business
expenses. Atty and Spouse have $20,000 of dividends and $10,000 of interest income.

Answer: Attorney is not allowed a §199A deduction. In this situation Attorney’s taxable
income is $476,000 ($500,000 plus $30,000 of dividends and interest less $30,000
of expenses and less a $24,000 standard deduction). Attorney is in a specified
services business (§199A(d)(2)) and since Attorney’s taxable income amount
exceeds the $415,000 ($315,000 plus $100,000) phase-in of the threshold amount
applicable to the to a specified services business (see §199A(d)(3) and (e)(2)),
the specific services’ business is not treated as a qualified trade or business
(§199A(d)(1)(A) and (3)), and Attorney does not qualify for a §199A deduction.
§199A(d)(1)(A).

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p. 946

1 Husband and Wife are both employees under age 65 with good eyesight. They file a joint return
in 2018 with no §62 deductions and use the std deduction. Compute their tax liability before
credits if:

(a) They have $200,000 of income from services [no 199A deduction], $5,000 of net capital
gain from stock held 3 years, and $3,000 of qualified dividend income.

Answer: Husband and Wife have gross income and adjusted gross income of $208,000
($200,000 from services, $5,000 net capital gain from stock, and $3,000 of
qualified dividends). Their taxable income after a $24,000 standard deduction
(§63(c)(2) and (7)(A)) is $184,000. Their tax liability is $32,019, computed as
follows: §1(h)(1)(A): a tax under §1(j)(2)(A) on $176,000, the greater of (i)
$176,000, $184,000 - $8,000 or (ii) $176,000 the lesser of: (I) $315,000 taxable
income taxed at a rate below 25% or (II) $176,000 taxable income reduced by
adjusted net capital gain ($184,000 less $8,000) The §1(j)(2)(A) tax on $176,000
is $30,819, $30,819 [$28,179 plus $2,640 (24% of $11,000 ($176,000 less
$165,000)) Plus §1(h)(1)(C): 15% of $8,000 (taxable income in excess of
$176,000) $ 1,200 Total tax $32,019 The effect here of §1(h) is to impose a 15%
ceiling on net capital gain and qualified dividend income which is made up of only
adjusted net capital gain and which would otherwise be taxed at rates above
15%.

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p. 950

1. Daddy Warbucks, a single txpr, has $600,000 of gross income which consists of $420,000 of
salary, $50,000 of ST capital gain, $60,000 of dividend income, $40,000 of profit from real estate
ltd pshp interest, and $30,000 of interest income. Daddy has no §62 deductions and will itemize
his deductions. Compute Daddy’s §1411 [net investment tax] tax liability.

Answer: Daddy Warbucks would have $6,840 of §1411 tax liability. Under §1411(a), he
has a tax of 3.8% of $180,000, the lesser of (1) his net investment income for the
year $180,000 ($50,000 STCG, $60,000 dividend income, $40,000 partnership
interest not reduced by a §199A deduction, and $30,000 of interest) or (2)
$400,000 ($600,000, his §1411(d) modified adjusted gross income less his
$200,000 §1411(b)(3) threshold amount). Thus 3.8% of $180,000 is $6,840.

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