Question

1.

Linda and Don are married and file a joint return. In 2019, they received $12,000 in Social Security benefits and $35,000 in taxable pension benefits and interest. The applicable higher/lower bases for Social Security computations for married filing jointly are $32,000 and $44,000.

a. Compute the couple’s adjusted gross income on a joint return.
$

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. Assume that their marginal tax rate is 12%.

With a 12% marginal tax rate, their after-tax economic income will by $.

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

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Answer 1

Answer :

Given particulars as follows

Social security benefits	$12,000
Taxable pension benefits & interest	$35,000
Applicable higher / Lower bases	$32,000/$44,000

Computation of AGI as follows

Taxable social security benefits	4,500
50% [(35,000 + (50% * 12,000) - 32,000) ]
Pension benefits	35,000
Total AGI	39,500

(b)

Existing corporate bond interest ($100,000 * 8%)	$8,000
Buy non taxable virginal bond interest	$6,000
Marginal Tax rate	12%

In the given scenario taxpayer economic income decreased by $2,000 ($8,000 - $6,000) and taxable income also decreased by $9,000

Compute After Tax economic income as follows

Decrease in interest income	$2,000
Decrease in tax liability (12% of 9,000)	($1,080)
Decrease in Economic income	$920

Hence their After tax economic income will decrease by only $920

(c). If Linda works part - time and earn $30,000

Lesser of
(1) 0.88 * [($35,000 + $30,000) + 0.5($12,000) - $44,000]	$23,760
Plus smaller of	$6000
0.5($12,000) = $6,000
0.5[$65,000 + 0.5(12,000) - $32,000] = 19,500
Total	$29,760
(Or)
(2). 0.88($12,000)	$10,560

Therefore Linda and Don would be required to include 88% of the social security benefits (10,560) in their Gross income

Compute Total AGI as follows

Social security benefits	$10,560
Total income including part time ($30,000 + $35,000)	$65,000
AGI	$75,560
AGI computed in solution (a) above	$39,500
Increase in AGI ($75,560 - $39,500)	$36,060

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