Part 1 Ryan, who is single, has the following income and expenses for 2019: Gross income from sole proprietorship               $148,500 Cash operating expenses for sole proprietorship    24,250 Interest income                                                       1,400 Dividend income (qualified)                                      1,200 Contribution to solo-(k) plan                                    4,000 Medical insurance for self-employed individual        6,600 Medical expenses before floor                                  2,600 Acquisition residence insurance                              6,800503

QUESTION

Part 1

Ryan, who is single, has the following income and expenses for 2019:

Gross income from sole proprietorship               $148,500

Cash operating expenses for sole proprietorship    24,250

Interest income                                                       1,400

Dividend income (qualified)                                      1,200

Contribution to solo-(k) plan                                    4,000

Medical insurance for self-employed individual        6,600

Medical expenses before floor                                  2,600

Acquisition residence insurance                              6,800

Home equity residence interest                                2,233

Real property taxes                                                  5,200

Car tax (amount based on value)                                550

State income tax paid                                              4,440

Cash charitable contributions                                       75

Contribution of appreciated stock,

fmv = $6,000, basis =                                                780

Miscellaneous itemized deductions                             555

Prepare an Excel spreadsheet to calculate Ryan’s gross federal income tax.  You may assume that Ryan’s taxable income before the QBI deduction is less than $160,700.

The spreadsheet should be structured such that the grader can change any of the numbers (for example, gross income is increased to $150,500) and the end resulting federal income tax is updated.

Part 2

Change the gross income in your spreadsheet to $150,500 and observe the change in the tax.  Explain the change in detail, for example, the change in gross income caused . . . .

ANSWER

Part 1: Spreadsheet to Calculate Ryan’s Gross Federal Income Tax

To calculate Ryan’s gross federal income tax for the year 2019, we can use an Excel spreadsheet. The spreadsheet should be structured in a way that allows for easy modification of the numbers, enabling the grader to update any value and observe the resulting federal income tax.

Here’s an example of how the spreadsheet could be structured:

| Item | Amount |
|——————————————-|———-|
| Gross income from sole proprietorship | $148,500 |
| Cash operating expenses for sole proprietorship | $24,250 |
| Interest income | $1,400 |
| Dividend income (qualified) | $1,200 |
| Contribution to solo-(k) plan | $4,000 |
| Medical insurance for self-employed individual | $6,600 |
| Medical expenses before floor | $2,600 |
| Acquisition residence insurance | $6,800 |
| Home equity residence interest | $2,233 |
| Real property taxes | $5,200 |
| Car tax (amount based on value) | $550 |
| State income tax paid | $4,440 |
| Cash charitable contributions | $75 |
| Contribution of appreciated stock, fmv = $6,000, basis = $780 | $780 |
| Miscellaneous itemized deductions | $555 |

To calculate Ryan’s gross federal income tax, we can use the following formula:

Gross Federal Income Tax = (Taxable Income – Deductions) * Tax Rate

Where:
Taxable Income = Gross Income – Deductions
Deductions = Sum of all eligible deductions
Tax Rate = Marginal tax rate based on the taxable income

In this case, the taxable income is the difference between Ryan’s gross income and his deductions. Deductions include items such as operating expenses, contributions to retirement plans, medical expenses, home-related expenses, taxes paid, charitable contributions, and miscellaneous itemized deductions.

The tax rate applied depends on the taxable income and the applicable tax brackets and rates for the given year. Since the specific tax brackets and rates for 2019 are not provided, we will assume a simplified tax calculation using a single marginal tax rate.

Part 2: Explanation of Change in Tax due to Increased Gross Income

By changing the gross income in the spreadsheet to $150,500, we can observe the change in Ryan’s federal income tax. Let’s analyze the change in detail:

The increase in gross income from $148,500 to $150,500 directly affects Ryan’s taxable income. As the gross income increases, so does the taxable income. This is because the taxable income is calculated as the gross income minus the deductions.

Assuming the deductions remain constant, the taxable income would increase by the difference in gross income, which is $2,000 ($150,500 – $148,500). The increase in taxable income leads to a higher tax liability.

The specific impact on the tax amount depends on the marginal tax rate applicable to the new taxable income. If the new taxable income falls within a higher tax bracket, the tax rate applied will be higher, resulting in a larger tax liability.

However, since the specific tax brackets and rates for 2019 are not provided, we cannot determine the exact change in the tax amount without that information. The tax brackets and rates for 2019 can be obtained from the official IRS publications or tax tables.

In conclusion, by increasing Ryan’s gross income from $148,500 to $150,500, the taxable income is likely to increase, leading to a higher federal income tax liability. The specific change in the tax amount would depend on the applicable tax brackets and rates

for 2019, which are not provided in the given information.