Paula lives in Arkansas, which imposes a state income tax. During 2016, she pays
ID: 2564717 • Letter: P
Question
Paula lives in Arkansas, which imposes a state income tax. During 2016, she pays the following taxes: Federal Tax Withheld = 5125 State Income Tax Withheld = 1900 State Sales Tax - Actual Reciepts = 370 Real Estate Tax = 1740 Property Tax on Car ( Ad Valoreum) = 215 Social Security Tax = 4324 Gasoline Tax = 124 Excise Tax = 112 a. If Paula's adjusted gross income is 35000 what is her allowable deduction for taxes? b. Assume the same facts as in part A except that Paula pays 1600 in sales tax on a motor vehicle she purchased during the year. What is Paula's allowable deductions for taxes?
Explanation / Answer
a) Paula is allowed an itemized deduction for the Real Estate tax and the property taxes she paid on the car during the current year. In addition, she can elect to deduct the greater of the amount she paid in state income taxes or her sales tax deduction. In determining the amount of her sales tax deduction, Paula deducts the greater of the actual amount paid in sales tax, or the IRS table amount. She can also add to the table amount any taxes she paid to acquire motor vehicles, boats and other vehicles specified by the IRS. Because the actual amount of $370 is greater than the table amount of $122 , her sales tax deduction is $370.
Since the amount Paul paid in state income taxes ($1900) is greater than her sales tax deduction($370), Paula would deduct her state income taxes. The social Security, gasoline and Excise taxes are not allowable taxes. The federal income tax withheld is not a deductible tax, but is a prepayment of Paula's federal tax liability.
Therefore Paula's Deduction for taxes is computed as follows :- (Amount in $)
b) As discussed above, Paula can elect to deduct the greater of the amount she paid in state income taxes or the amount of her sals tax deduction, In determining the amount of her sales tax deduction, Paula would take the greater of the actual amount paid in sales tax $1,722 ($122+$1,600) or the $1,900 she paid in state income taxes.
Since the total state income taxes of $1,900 exceeds the amount of State sales tax, She would elect to deduct her state income taxes. Thus the total deduction allowed is as follows :-
The amount of $122 is calculated from IRS table for Arkanas. For this calculation I have assumed that Exemptions allowed are over 5, as no mention of exemptions are given in the queation.
State Income tax withheld 1,900 Real Estate tax 1,740 Property tax on car (Ad Valoreum) 215 Total tax Deduction 3,855