Clarabelle Cow uses the filing status of single. She has two dependent children (both under the age of 17) and she retired from the fire department during the year. She had the following items of income and expense for 2023: Salary, prior to retirement 140,625 Interest income from Wells Fargo Bank 7,100 Interest income from Apple stock 4,220 Interest income from City of New Orleans bonds 6,870 Pension (use a 42% exclusion ratio) 12,000 Qualified dividends from Disney, Inc. 5,145 Income from illegal activities 3,850 Gift received from her favorite Aunt Carol 2,000 Unemployment compensation 1,940 Lottery winner! 5,000 Long-term capital loss (4,450) Alimony paid (divorce finalized in 2017) 3,250 Child support paid 10,000 Personal loan from her parents 7,500 Itemized deductions 12,950 a. What is Clarabelle’s Adjusted Gross Income for 2023? b. What is Clarabelle’s tax liability for 2023? (Hint! Don’t forget that qualified dividends are taxed at a lower rate!)
a. Clarabelle's Adjusted Gross Income (AGI) for 2023 can be calculated as follows: Salary: $140,625 Interest income from Wells Fargo Bank: $7,100 Interest income from Apple stock: $4,220 Interest income from City of New Orleans bonds: $0 (municipal bond interest is generally tax-exempt) Pension: $6,960 (58% of $12,000, as 42% is excluded) Qualified dividends from Disney, Inc.: $5,145 Income from illegal activities: $3,850 Unemployment compensation: $1,940 Lottery winnings: $5,000 Long-term capital loss: -$3,000 (the maximum deductible loss is $3,000) Alimony paid: $0 (for divorces finalized after 2018, alimony is not deductible) Child support paid, personal loan, and gift received are not considered income or deductions for tax purposes. Adding these together, Clarabelle's AGI for 2023 is $171,840. b. Clarabelle's tax liability for 2023 is more complex to calculate and depends on the tax brackets for that year, which are not provided. However, she would be able to claim the Child Tax Credit for her two children, which could reduce her tax liability. Her qualified dividends would be taxed at the lower capital gains tax rate, not the ordinary income tax rate. It's recommended to
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