High School

Read the following letter and help Grady DeWitt with his tax situation. Assume that you have already determined that his gross income is $180,030, which consists only of salary.

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Dear tax preparer,

Hi, my name is Grady DeWitt. I just got back from my 55th birthday party, and I’m told that you need some more information from me in order to complete my tax return. I’m an open book! I’ll tell you whatever I think you need to know.

Let me tell you a few things about my life. As you may recall, I am divorced from my wife, Sandra. I know that it's unusual, but I have custody of my son, Grady, Jr. He lives with me full-time, and my wife gets him every other weekend. I pay the vast majority of my son's expenses. I think Sandra should have to pay some child support, but she doesn't have to pay a dime.

I had to move this year after getting a new job at Pexi Cola. We moved on February 3 of this year, and I worked my job at Pexi for the rest of the year. I still live in the same state, but I moved 500 miles away from my old house. I hired a moving company to move our stuff at a cost of $2,530.

Can you believe I’m still paying off my student loans, even after 15 years? I paid a total of $19,800 in interest on my old student loans this year.

Remember when I told you about that guy that hit me with his car? I had a bunch of medical expenses that were not reimbursed by the lawsuit or by my insurance. I incurred a total of $22,300 in medical expenses, and I was only reimbursed for $12,150. Good thing I can write off medical expenses, right?

I contributed a lot of money to charity this year (and have receipt documentation for all contributions). I’m such a nice guy! I gave $1,230 in cash to the Salvation Army. I contributed some of my old furniture to the church. It was some good stuff! I contributed 10 shares of Caterpillar, Inc. stock. The stock is worth $6,150 today, and I only paid $1,230 for it a few years ago. Pexi Cola had a charity drive for the United Way this year, and I contributed $228. Oh, one other bit of charity from me this year. An old buddy of mine was down on his luck. He lost his job and his house. I gave him $615 to help him out.

I paid a lot of money in interest this year. I paid a total of $1,180 in personal credit card interest. I also paid $19,150 in interest on my $550,000 home mortgage that helped me buy my dream home. I also paid $2,460 in real estate taxes for my new house.

A few other things I want to tell you about this year. Someone broke into my house and stole my kid's brand new bicycle and my set of golf clubs. The total loss from theft was $1,130. I paid $240 in union dues this year. I had to pay $1,200 for new suits for my job. Pexi Cola requires its managers to wear suits every day on the job. I spent a total of $1,530 to pay for gas to commute to my job this year.

My employer withheld $13,800 in FICA taxes, $32,100 in federal income taxes, and $8,500 in state income taxes from my paychecks.

Oh, this is pretty cool. I've always wanted to be a firefighter. I spent $1,630 in tuition to go to the local firefighter's school. I did this because someone told me that I can deduct the tuition as an itemized deduction, so the money would be coming back to me.

That should be all the information you need right now. Please calculate my Adjusted Gross Income and Taxable Income. Remember, assume that you had previously determined that his gross income was $180,030.

Answer :

The Taxable Income is $151,850, obtained by subtracting the total deductions for charitable contributions ($7,223), personal credit card interest ($1,180).

To calculate the Adjusted Gross Income (AGI), we deduct specific deductions from the gross income. In this case, we subtract the moving expenses, student loan interest, and unreimbursed medical expenses from the gross income of $180,030. The total deductions amount to $2,530 + $19,800 + ($22,300 - $12,150) = $30,480. Therefore, the AGI is $180,030 - $30,480 = $177,730.

To determine the Taxable Income, we subtract the itemized deductions from the AGI. The total deductions consist of charitable contributions, personal credit card interest, home mortgage interest, real estate taxes, theft loss, union dues, job-related expenses, and tuition deduction. Adding up these deductions gives us $7,223 + $1,180 + $19,150 + $2,460 + $1,130 + $240 + $1,200 + $1,630 = $34,213. Hence, the Taxable Income is $177,730 - $34,213 = $151,850.

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