Question 2 (16 marks)

Kyle is divorced and has custody of his 14-year-old son. His ex-wife pays him $2,500 per month: $1,500 for alimony and $1,000 for child support, pursuant to a divorce agreement from 2015. In addition, she pays for all extras, such as sports fees, braces, and so on. In 2018, these extras totaled $12,350.

During 2018, Kyle earned $35,000 before being laid off from his job. He has been unable to find another job. He pays $900 per month in health care premiums for coverage for himself and his son.

A few years ago, Kyles grandparents lent him some money. He had been faithfully paying them back until he lost his job. The balance of the loan was $12,500. When he lost his job, his grandparents forgave the loan, as they wanted to help him out.

During 2018, Kyle received the following:

Interest from savings account $1,165

City of Miami bond interest 3,330 Zippy Ltd. corporate bond interest 1,000

Dividends from Peach Ltd. 7,500

Interest on a loan to his half-brother 500

State income tax refund of 2017 taxes 300

Federal income tax refund of 2017 taxes 800 Inheritance from Aunt Natalie 20,500

Share of income from Tyger Partnership for 2017

(received in February 2018) 12,000

Winnings from a state lottery draw 10,000 Proceeds from sale of RW Ltd. stock (basis = $9,000) 5,000

For 2017, Kyle claimed the standard deduction. For 2018, Kyle paid mortgage interest totaling $8,000 and property taxes of $2,800. He has been notified that his share of income from Tyger Partnership for 2018 is $17,000 and that distribution is expected to be at the end of January 2019. Kyle spent a total of $500 on lottery tickets during 2018. In 2018, Kyles employer withheld $2,200 in state income tax and $3,500 in federal income taxes.

Required:

Show all your work.

For 2018, calculate Kyles

1. adjusted gross income (AGI),
2. taxable income, and
3. federal tax liability or refund.

For items that you have not included in your calculations, explain why.