High School

David and Doris Kelley were divorced on February 3, 2018. The divorce decree required David to make the following payments:

a. Transfer full title to their jointly owned family home to Doris. The fair market value of the home is $180,000, with a basis of $150,000.

b. Pay $1,000 per month in mortgage payments on the house mentioned above. The mortgage has 20 years remaining before being fully paid off, but the payments would end on her death.

c. Pay $2,000 per month for 10 years in support payments to Doris, of which $600 per month is child support.

d. Doris insisted that the children attend private schools. In 2020, David paid $1,500 in tuition for the children's private high school.

David paid his lawyer $5,000 to represent him in the divorce proceedings. David and Doris agreed that Doris would maintain a home for the children. Further, Doris agreed to allow David to claim one child as a dependency exemption. This agreement was put in writing and signed by Doris.

Besides the divorce, David has had a big year financially. He owns an apartment house and requires each new tenant to place a $750 security deposit with him before moving into the apartment. When the tenant ultimately vacates the apartment, David will refund the deposit. In 2020, David collected $3,750 in security deposits and rental income of $15,000.

David entered a local raffle in 2020. He won first prize, which was a new automobile with a window price of $20,000. He checked with several local car dealers and found that if he had purchased a similar car on his own, the price would have been $18,200.

David loaned his sister Lois $5,000. Lois was repaying the loan at $100 per month plus interest of $40. Since Lois was about to depart on an extended vacation on December 2, 2020, she gave David $200 plus interest of $80 to cover the months of December and January.

David has a good job that pays an annual salary of $50,000. In 2020, business was very good, and in December 2020 bonuses were announced for the employees. David earned a $4,000 bonus for 2020. Bonuses would be mailed to the employees during the first week of January 2021. David has itemized deductions of $20,000.

Determine David's 2020 taxable income.

Answer :

David's taxable income for 2020 is calculated by summing up his salary, raffle prize, rental income, and interest received, and then subtracting his itemized deductions. The resulting taxable income is $65,080, not including any additional tax deductions or credits he may be eligible for.

To determine David's taxable income for 2020, we'll need to consider his various sources of income and applicable deductions. Let's break down each component.

  • David's annual salary: $50,000
  • He won a car worth $20,000 from a raffle, which can be considered as income.
  • He collected $15,000 in rental income from his apartment house.
  • He received interest of $80 from the loan to his sister.
  • David cannot include the security deposits of $3,750 as income since they are refundable to his tenants upon vacating.
  • The bonus of $4,000 he earned will be taxable in the year it's received, so it's not included in his 2020 taxable income.
  • His itemized deductions are $20,000.

So, David's gross income for 2020 is $50,000 (salary) + $20,000 (car raffle prize) + $15,000 (rental income) + $80 (interest) = $85,080.

After applying his deductions, his taxable income would be $85,080 - $20,000 = $65,080.

It should be noted that this calculation does not consider other potential deductions or credits that David might be eligible for, such as the dependency exemption mentioned or mortgage interest deduction on his personal tax return. Consulting a tax professional is advisable for the accurate calculation of taxable income.