2. (7 points) Ed and Wendy are a married couple with no children. Each earns $75

Question

2. (7 points) Ed and Wendy are a married couple with no children. Each earns $75,000 per year, and their combined household adjusted gross income i Kristen also have $150,000 in combined household adjusted gross income and no children. However, Kristen earns all of the income; John does not work. Suppose that each family has an exemption of S3,950 per person. The standard deduction is S6,200 for a single taxpayer and $12,400 for married couples s $150,000. John and (a) Use the following tax rates for married couples filing jointly to compute how much income tax each couple owes. Assume that both take the standard deduction. Taxable Income S0 to S18,150 $18,151 to $73,800 $73,801 to $148,850 $148,851 to $226,850 $226,851 to $405,100 Marginal Tax rate 10% 1 5% 25% 28% 33% (b) Use the following tax rates for single taxpayers to compute how much income tax each person owes if they do not get married. Is this tax system marriage neutral? Does either couple pay a “marriage tax?" Does either couple receive a “marriage benefit?" Taxable Income S0 to $9,075 S9,076 to $36,900 S36,901 to $89,350 $89,351 to $186,350 $186,351 to $405,100 Marginal Tax rate 10% 15% 25% 28% 3390

Explanation / Answer

Gross Income - $150000

Exemption claimed - $3950 x 2 = $7900

Standard deduction claimed - $12400

Taxable Income = $150000 - $7900 - $12400 = $129700

Both the couples fall under the 25% marginal tax bracket

For individual filing John does not have any computation as his tax liability is Nil.

Gross Income for Ed and Wendy - $75000

Exemption claimed - $3950

Standard deduction - $6200

Taxable Income = $75000 - $3950 - $6200 = $64850

Gross Income for Kristen - $150000

Exemption claimed - $3950

Standard deduction - $6200

Taxable Income = $150000 - $3950 - $6200 = $139850

By the computations above we can say that the tax system is marriage neutral only till the portion of third tax bracket.

Neither couple pays a marriage tax. However, John and Kristen enjoy a marriage benefit of ($32335 - $24138) $8197 by filing jointly.

Tax computation for each couple filing jointly Tax Bracket Income Tax rate Tax Amount $0 to $18150 $18,150 10% $1,815 $18151 to $73800 $55,650 15% $8,348 $73801 to $148850 $55,900 25% $13,975 Total $129,700 $24,138 Tax computation of Ed Tax Bracket Income Tax rate Tax Amount $0 to $9075 $9,075 10% $908 $9076 to $36900 $27,825 15% $4,174 $36901 to $89350 $27,950 25% $6,988 Total $64,850 $12,070 Tax Computation of Wendy Tax Bracket Income Tax rate Tax Amount $0 to $9075 $9,075 10% $908 $9076 to $36900 $27,825 15% $4,174 $36901 to $89350 $27,950 25% $6,988 Total $64,850 $12,070 Tax Computation of Kristen Tax Bracket Income Tax rate Tax Amount $0 to $9075 $9,075 10% $908 $9076 to $36900 $27,825 15% $4,174 $36901 to $89350 $52,450 25% $13,113 $89351 to $186350 $50,500 28% $14,140 Total $139,850 $32,335

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