Income Tax Chapter 15
#60

Tom's Salary

$50,000
Alice's Revenue

$185,000
Gross Income

$235,000
Less: Deductions for AGI

Business expenses (not including home office)
$93,900

Home office*
$2,984

Self-employment tax**
$6,436
($103,320)
Adjusted gross income

$131,680
Less: Deductions from AGI

Itemized deductions***
$15,680

Personal & dependency exemptions
$15,800
($31,480)
Taxable Income

$100,200

Taxes due on $100,200

$16,763
Plus: Self-employment tax**

$12,872

$29,635
Less: Prepayment and credits

Income tax withheld
$5,000

Estimated tax payments
$25,000
($30,000)
Net tax payable (or refund due)

($366)

*Home office deductions: 1/10 of total costs

Utilities
$450

Insurance
$210

Property tax
$520

Repairs
$350

Total
$1,530

Plus cost recovery (400,000 x 1/10 x 3.636 %)
$1,454

**Net earnings from self-employment
$91,100

multiply 91,100 x 92.35%
$84,131

multiply 84,131 x 15.3% (this is the self-employment tax)
$12,872

Deduction for AGI = 12872 x .5
$6,436

*** itemized deductions excluding the house
$11,000

plus itemized deduction including the house

Property taxes =5200 x 9/10
$4,680

Total itemized deductions
$15,680

Part 2:
November 30th 2014
Mr. and Mrs. Tom Honeycutt
101 Glass Rd
Delton, MI 49046

Dear Mr. Mrs. Honeycutt,

You’ve asked my advice on the two different proposals presented to you in exchange for the farmland inherited from Tom’s father, believing either transaction to be a like-kind exchange. Unfortunately, under Section 1031, both properties must be held for use in a trade or business or for investment. Property that is used mainly for personal use does not qualify. Because you are going